AFM Issue 82 by AFM Magazine

The business and financing of airline operations

One to one: Amentum CEO Freighter conversion Guide to operating leases Cargo review

Green thinking: Recycling and the ETS Published by

January-February 2013 Issue 82 www.afm.aero

Foreword

Editor Mary-Anne Baldwin Mary-Anne@afm.aero +44 (0)208 831 7511 Contributors Oliver Clark, Steven Thompson, Martin Roebuck and Thomas Reich.

nd so we open the door to another year. Last year produced a tough 12 months for many of us, but it was not without touches of positivity and growth. Can we expect the same for 2013? According to IATA, a day doesn’t actually make that much difference and the chinking of glasses on New Year’s Eve did not signal much change for the industry. IATA predicts that GDP will grow slightly to 2.3 per cent, passenger demand will rise by 4.5 per cent and cargo demand will grow 1.4 per cent compared with a two per cent decline in 2012.

Advertising Manager Ellis Owen Ellis@afm.aero +44 (0)208 831 7519 Editorial Director Joe Bates joe@aviationmedia.aero Design Andrew Montgomery andy@afm.aero

Net airline profits, it adds, will grow to $8.4bn, resulting in a 1.3 per cent net profit margin.

Website Jose Cuenca jose@aviationmedia.aero Published on behalf of UBM Aviation by Aviation Media Sovereign House 26-30 London Road Twickenham, TW1 3RW, UK

“It is good that we are moving in the right direction, but the year ahead is shaping up to be another tough one for the industry,” said its CEO, Tony Tyler. This year was meant to mark the start of worldwide involvement in the emissions trading scheme (ETS), yet we heard in late 2012 that the European Union has ‘stopped the clock’ on the ETS for a one year period, something we investigate on page 46.

Managing Director & Publisher Jonathan Lee Jonathan@aviationmedia.aero AFM IS A FULLY AUDITED MAGAZINE Website: www.afm.aero AFM does its best to use recycled products or those from renewable sources. AIRLINE FLEET MANAGEMENT (ISSN 1757-8833) Online: 1757-8841 (USPS 022-324) is published bi-monthly by UBM Aviation Publications Ltd and distributed in the USA by SPP, 95 Aberdeen Road, Emigsville PA. Periodicals postage paid at Emigsville, PA. POSTMASTER: send address changes to AIRLINE FLEET MANAGEMENT, c/o PO Box 437, Emigsville PA 17318.

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Also in this environmental issue, we take a look at aircraft recycling and tied to this matter, the age at which we are typically choosing to scrap our aircraft. While a lower economic life is detrimental to aircraft owners, it’s the opposite for manufacturers. Boeing, in particular, is altogether more optimistic about 2013 than IATA. It recently projected “reasonable liquidity and pricing for new-aircraft delivery financing in 2013” and a healthy amount of sales to match. And despite the turmoil surrounding a series of 787 faults, it does seem Boeing has reason to be upbeat. It pushed its way to become leader of the aircraft manufacture duopoly for the first time since 2002. During 2012, it posted 1,203 net

orders and delivered 601 aircraft – its highest figures since 2007 and 1999 respectively. The year was also a good one for Bombardier. It scooped 481 aircraft orders and delivered 233 aircraft. This compares with the 249 orders and 245 deliveries taken during the 11 months ending 31 December, 2011. “Overall, we are seeing positive momentum across our entire product portfolio,” commented Guy Hachey, CEO of Bombardier. IATA predicts that Asia-Pacific airlines should see profits grow between $200m to $3.2bn; Middle Eastern airlines by $300m to $1.1bn, and Latin American airlines by $300m to $700m. And even in Europe, where we are expected only to breakeven, there are new and exciting ways to build revenue – for example, e-commerce and ancillaries. Travel is the largest sector in e-commerce with an estimated $85.7bn spent in online flight bookings in 2012, according to Atmosphere Research Group. So let’s enter 2013 with spring in our step, confident that the worst is behind us and that any hardships last year will have given us the tools to build a brighter year ahead.

Editor Mary-Anne Baldwin

The views expressed in each edition of Airline Fleet Management (AFM) are not necessarily the views of UBM Aviation Publications Limited, but of individual authors and contributors and UBM Aviation Publications Limited shall therefore not be liable for the contents of any articles included in this publication. AFM, part of UBM Aviation, has used its best efforts in collecting and preparing material for inclusion in AFM but can not and does not warrant that the information contained in this product is complete or accurate and does not assume and hereby disclaims, liability to any person for any loss or damage caused by errors or omissions in AFM whether such errors or omissions result from negligence, accident or any other cause.

afm • Issue 82 – January–February • www.afm.aero

The business and financing of airline operations AIRLINE FLEET MANAGEMENT

One to one: Amentum CEO Freighter conversion Guide to operating leases Cargo review

Green thinking: Recycling and the ETS ISSUE 82 January–February 2013

Published by

January-February 2013 Issue 82 www.afm.aero

20 26

Issue 82 January - February

In this issue

03 08 16 20 26 28

Foreword

News round up The latest on deals, mergers, appointments and more. Focus: One to one: Martin Bouzaima, CEO of Amentum Right on the back of Amentum’s management buyout from its former parent, HSH Nordbank, Amentum’s CEO Martin Bouzaima, talks to us about the aircraft leasing market.

Fleet Operations: Ensuring cargo growth: A heavy load to carry Martin Roebuck examines air cargo operators as a means to assess the market and discover whether those green shoots of growth have wilted.

Farewell, the 50-seater Thomas Reich, director of air service development at AvPORTS, reports on the demise of the once much-loved 50-seat regional jet.

Freighter conversions Kevin Casey, president of Pemco, delivers his insight into the freighter conversion market and explains why he’s optimistic about the future.

afm • Issue 82 – January–February • www.afm.aero

CONTENTS

34 40 46 50 54

46 54

Maintenance operations One man’s rubbish: Aircraft recycling Martin Todd, AFRA’s communications manager, takes us through recent developments in the aircraft recycling and disassembling sector.

Trading, legal and finance Operating leases: Their role in today’s market Leasing experts at Boeing’s aircraft manufacturing headquarters in Seattle discuss the fundamentals of commercial aircraft leasing, its recent growth and the crucial role that lessors play.

ETS: Where are we now? After years of dispute, the European Union has suspended its emissions trading scheme outside of Europe. But what comes next? Mary-Anne Baldwin investigates.

Aircraft economic life: Is age just a number? Is the standard depreciation age of 25 still relevant today when airlines choose young fleets and aircraft are being retired early? Mary-Anne Baldwin examines the issues.

AIRPORTS AND ROUTES Airline and airport partnerships: In pursuit of ancillaries Mary-Anne Baldwin reports from the Low Cost Airlines World conference at which airlines and airports came together to discuss cost-effective partnerships.

DATA Industry data Data including: market, list and lease rates for engines and aircraft; firm orders and deliveries; traffic and airline finances.

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NEWS

Nightmare string of faults for the Dreamliner The 787 Dreamliner has been dogged by a series problems, which have caused the Federal Aviation Authority (FAA) to launch an investigation into the overall safety of the aircraft. At the time of going to press all 787 flights and deliveries were on hold. An ANA Dreamliner was forced into an emergency landing on 16 January following a warning of smoke in a battery compartment. It marked the carrier’s decision to ground its 17 Dreamliners. On 10 January, All Nippon Airways (ANA) cancelled a 787 flight from Yamaguchi, Tokyo after registering an error message in the aircraft’s braking system. The prior day, Japan Airlines (JAL) cancelled a flight to Boston following a fuel leak and on 8 January the airline suffered another incident when a fire broke out on a 787 that had landed at Boston Logan International airport. The fire was thought to caused when a

lithium-ion battery, which was in the aircraft’s auxiliary power unit, exploded. Furthermore, ANA also reported a crack in one of its Dreamliner’s cockpit windows and United Airlines was forced to divert its 787 after discovering a fault with its generators – an issue that was reported by Qatar Airways. With all the new technology that is packed into the Dreamliner, it is not surprising that early operators notice some glitches. In fact, it may be inevitable. But it will still have an affect on the image of the 787 and on Boeing in general. Akbar al-Baker, CEO of Qatar Airways, which posted the largest order for the aircraft, was quick to jump to the 787’s defense – no doubt to curb the concern of investors and passengers. “Of course there will be teething problems from time to tome, but this is foreseen with any new aircraft programme,” he said.

Aerosvit aircraft seized as it faces bankruptcy

Dana Air to resume flights following June crash

Ukraine airline, AeroSvit, is undergoing bankruptcy proceedings after it declared its debt to a local court. The airline has had a number of its aircraft detained, these include one at Warsaw on 4 January and another at Stockholm on 5 January. Rival, Ukraine International Airlines, stepped in to transport the passengers who were stranded after the aircraft were seized. AeroSvit operates a fleet of owned 737s and 767s, plus leased A320s and E190s.

Nigerian airline, Dana Air, has resumed flights after a crash in June, which killed 163 people. The carrier has not yet determined the cause of the crash, nor has it paid insurance to the families of the dead. In order to sell tickets on flights, which resumed in January, Dana Air has slashed its prices to half that of its rival airlines. The incident involved one of Dana Air’s MD-83 aircraft. It crashed in a neighbourhood near Lagos on 3 June, killing everyone onboard and 10 people on the ground. Dana Air’s fleet is comprised solely of MD-83s.

NEWS IN BRIEF Avolon to add 20 A320 Neos to its portfolio Avolon has confirmed an order for 20 A320 Neo aircraft, which was agreed with Airbus in December last year. The deal is on top of the lessor’s order for 15 A320 Neos, which it announced at the Farnborough Air Show in July last year. It brings Avolon’s total orders for the aircraft to 35. “Our increased commitment to the Neo reflects the strong customer feedback we have received since our original announcement for 15 Neo aircraft in July 2012,” commented John Higgins, Avolon’s chief commercial officer. Avolon will make its engine selection at a later date.

Bombardier declares 2012 a success Bombardier scooped 481 aircraft orders (net of cancellations) and delivered 233 aircraft during 2012. This compares with the 249 orders and 245 deliveries taken during the 11 months ending December 31, 2011. Within these orders, Bombardier delivered 179 business jets last year, compared to 163 for the previous 11 month period. It received 343 biz jet orders, compared to 191 for the previous fiscal year. Additionally, the manufacturer delivered 50 commercial aircraft, compared with 78.

It took orders for 138 commercial aircraft, compared to 54. “A number of our existing customers reaffirmed their confidence in Bombardier aircraft in 2012 with fleet growth and fleet replenishment orders, and we proudly welcomed new customers from emerging and traditional markets. We are the market leaders in business aircraft, and the restructuring of our commercial aircraft sales organisation is yielding results. Overall, we are seeing positive momentum across our entire product portfolio,” commented Guy Hachey, CEO of Bombardier.

afm • Issue 82 – January–February • www.afm.aero

NEWS

Human error caused Sukhoi crash Indonesian officials have cited human error as the cause for the crash of a Sukhoi aircraft on 9 May, 2012, which killed all 41 crew and passengers on board. The Sukhoi RRJ-95B aircraft, registered 97004, flight number RA 36801, crashed at Mount Salak, West of Java. It was conducting a demonstration flight from Halim Perdanakusuma International Airport, Jakarta, flying in the Bogor Area. Following an extensive investigation, authorities yesterday issued a statement that said the aircraft lacked charts containing information on the local terrain. “The crew were not aware of the mountainous area surrounding the flight path,” the report stated. It added that the crew had been distracted by “prolonged conversation not related to the progress of the flight”, both of which caused the pilots to disregard numerous warnings sounded by the terrain awareness warning system (TAWS). The report stated: “A simulation test suggested that a recovery action might have avoided the collision with terrain up to 24 seconds after the first TAWS warning.” Findings show the TAWS first sounded 38 seconds before the aircraft struck the mountain. It is thought the pilot believed the warnings to be invalid. The National Transportation Safety Committee (NTSC) issued immediate safety recommendations to the Indonesia Directorate General of Civil Aviation (DGCA); Soekarno-Hatta International Airport; Department of Aviation Industry – the Ministry of Trade and Industry of Russia, and Sukhoi.

GE Aviation to offload manufacturing arm GE Aviation is to sell part of its aviation division to Woodward Inc for $200m. GE will divest its Cincinnati-based arm, which builds hydraulic thrust reverser actuation systems for commercial airlines. It is thought the division employs 350 workers. Woodward will fund the purchase through cash and committed financing options, which currently include a $400m revolving credit facility.

SIA orders 25 new widebodies Singapore Airlines (SIA) has firmed an order for 25 more widebody aircraft. The deal, which was completed in 2012, includes five A380, and 20 A350-900s. SIA has placed three consecutive orders for the A380, making it the second largest customer of the A380, it now has 19 aircraft in service. “This second repeat order from one of the largest A380 operators today is a great endorsement,” said John Leahy, Airbus’ chief operating officer, customers. SIA will use the A350-900s aircraft on both medium- and long-haul routes.

VistaJet order signals return of biz jet market  Christmas came early to Bombardier when it confirmed its largest ever order for business jets in December last year. Vistajet, a Swiss fractional ownership company, ordered 142 aircraft worth up to £7.8bn ($12.5bn) with options. Not only will the deal secure jobs at Bombardier’s Northern Ireland manufacturing plant, it also signalled the return of the biz jet market, which plummeted at the start of the recession when business owners and the wealthy were chastised for showing a lack of frugality. Or perhaps it is VistaJet that is signalling this boost in demand. Already the “world’s leading luxury private jet company”, the firm is aiming to double its size by 2015 as it expands into the developing BRINC (Brazil, Russia, India, Nigeria and China) markets. NetJets also placed what is now history’s second largest aircraft order for 275 Challenger 300s and 605s back in June. The latest deal comprises 25 Global 5000s, 25 Global 6000s and six Global 8000s, plus options for 40 Global 5000s, 40 Global 6000s and six Global 8000s. Deliveries are due to start in 2014 with one aircraft handed over each month thereafter. It appears that lavish spending is now back on the agenda as more people are stepping into the compact but luxurious confines of a private jet. So, does this mean the economy is back to health? Certainly Bombardier is looking a little healthier after its shares rocketed eight per cent on the deal. However, global GDP does not seem to reflect the boost in demand for biz jets. Perhaps those able to afford the high life are just a bit bored of having to hide it.

MEA firms order for 10 A320s Middle East Airlines-Air Liban (MEA) has firmed its order for 10 A320 family aircraft following its memorandum of understanding (MOU). Director general of the flag-carrying airline, Mohamad El Hout, called the aircraft a “sound investment.” The order includes five A321 neo and five A320 neo aircraft. MEA currently operates four A330-200s, four A321s and ten A320s. “Middle East Airlines is going to be well positioned with these A320 Neo Family aircraft in its fleet” said John Leahy, Airbus’ chief operating officer, customers.

Gulf Air to cut routes and jobs Gulf Air is to slash routes and jobs in a bid to boost profitability by 2017. The carrier has announced that it will cut services to Kathmandu, Dhaka and Colombu. The news came on the back of an announcement that Gulf Air has also closed routes to Copenhagen and Rome. It cited “commercial reasons” as cause of the closures, however unionists claim that the routes are commercially viable. In addition, Gulf Air is to axe around 1,800 jobs, local news sources have reported. This includes 800 jobs, which are to be cut soon. Unionists have been fighting the plans.

afm • Issue 82 – January–February • www.afm.aero

NEWS AIRPORTS & ROUTES: Airport charges

Boeing wins landmark MAX order with ACG Boeing celebrated the New Year having clinched an order for 60 737 MAX aircraft. The deal, made with Newport Beach-based leasing company, Aviation Capital Group (ACG), pushed total orders for the MAX to above the 1,000 mark. The order, which was finalised in December 2012, but only announced in January 2013, was for 50 737 MAX 8s and 10 737 MAX 9s. It brings total orders for the MAX aircraft to 1,029. “Reaching 1,000 orders in just over a year’s time from our first order validates the exceptional value the 737 MAX offers our customers,” said Bob Feldmann, VP and general manager for the 737 MAX. The agreement, which is worth $6bn at list prices, also reflects demand from the leasing sector, which had been negative about the affect re-engined aircraft may have on other aircrafts’ residual values and lease rates.

Denis Kalscheur, CEO of ACG, which has a fleet of 240 aircraft flown by 90 airlines, said: “This order is a major step in building our broad portfolio of modern, fuel-efficient airplanes.” However, the order has not tipped the scales weighing Boeing against Airbus – Airbus has 1,500 orders for its comparable A320 Neo aircraft. Airbus has maintained its lead with orders for next generation aircraft – but it did start selling them earlier. Now, the gap between them is small enough to believe that the MAX will be a real contender against the Neo. According to Boeing, the aircraft offers an eight per cent cost advantage per seat, compared with the Neo. The MAX also reduces fuel burn and Co2 by 13 per cent compared with its older cousin, the 737. The manufacturer now has an order backlog for the MAX of over seven years and will grow its manufacturing plant in Renton so that it can produce 42 of the aircraft a month by the 2Q 2014.

Doors to Saudi’s domestic market opens, but only a crack Qatar Airways and Gulf Air have become the first foreign airlines to obtain licences to operate domestic flights within Saudi Arabia, the General Authority for Civil Aviation (GACA) announced. However, it may take up to six months for other foreign airlines to be permitted to enter the market.

The licences will open up Saudi Arabia’s domestic market, which is currently only served by its national carrier, Saudi Arabian Airlines, and budget carrier, National Air Services. It is thought that 14 airlines have applied for permission to operate domestic flights in the region.

NEWS IN BRIEF Boeing to beat Airbus to the top spot Boeing has pushed its way to become leader of the aircraft manufacture duopoly having posted 1,203 net orders during 2012. It also delivered 601 aircraft – its highest number since 1999. Sales were the highest since 2007, buoyed by the 737 programme, which broke the record for the most deals in a year by taking 1,124 orders. Included in this were 914 orders for the 737 MAX. To date, Boeing has delivered 49 787s to eight customers. The 777, which totaled 83 deliveries in 2012 and surpassed 1,000 since launch, won 68 net orders.

CIT confirms order for 10 A350s CIT has placed an order with Airbus for 10 A350-900 aircraft, bringing the lessor’s total backlog for the type to 15. “This order for Airbus A350 XWBs will further expand our portfolio of medium-to-long haul aircraft,” said Jeffrey Knittel, president of CIT transportation finance.” CIT has more than 110 twin-aisle aircraft currently in its portfolio or on order. Including this deal, CIT has ordered a total of 253 Airbus aircraft, including 187 A320 family aircraft, 51 A330s and 15 A350 XWBs.

Sky Aviation takes delivery of first Superjet 100 Indonesia’s Sky Aviation has taken delivery of the first Sukhoi Superjet 100, record of which was signed on 29 December. The document states that the aircraft is technically sound and fully meets the performance criteria. The aircraft, MSN 95022, will be flown to the carrier’s delivery base at Ulianovsk this month, shortly after which it will start commercial flights. Indonesian officials recently named human error as the cause of the Superjet 100 crash which killed 41 people on 9 May, clearing the aircraft’s name and any concerns over its safety.

afm • Issue 82 – January–February • www.afm.aero

The state of aircraft

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NEWS: Routes News

Mumbai gives away six Kingfisher slots to IndiGo grounded airline will lose all its slots, CNBC-TV18 reported. The Airports Authority of India (AAI) has warned Kingfisher that it will start taking away space allotted to it across the country’s airports, if it fails to submit a concrete revival plan by mid-January.

Kingfisher stopped flying on 1 October following a strike by engineers and pilots who hadn’t been paid since March. The Directorate General of Civil Aviation (DGCA) then suspended the licence of the airline. Shares of Kingfisher Airlines slipped four per cent after (CSIA) gave away the slots.

Etihad Cargo to launch new weekly operation to Chinese city of Guangzhou

Air France launches new economy product at four French bases

from Air France’s loyalty programme – Flying Blue miles.

Etihad Cargo is to launch a new direct weekly freighter operation from Abu Dhabi to the southern Chinese city of Guangzhou. The new service will operate every Thursday using an Airbus A330-200F freighter, with a capacity of 68 metric tonnes. Guangzhou is the third largest city in China, the capital of the Guangdong province, and a major centre for the manufacture of electronic goods, Etihad said. Kevin Knight, Etihad Airways’ chief strategy and planning officer, said: “China is a strategically important market for Etihad Cargo, and the new Guangzhou–Abu Dhabi freighter service will allow us to capitalise on the strong export demand coming out of southern China.”

Air France has launched a new low-cost fare for short and medium haul flights from four French bases. The airline will offer a two-tier price structure – Classic and MiNi – to passengers flying from Paris-Orly, Nice, Marseille, and Toulouse. The new MiNi fare will be sold alongside the classic fare. The budget option, which is priced from €49 ($65), includes on board refreshments, but customers must pay an additional €15 ($20) for checked baggage. Air France confirmed that the new fare is aimed at customers who had been tempted away from the French flag carrier by low-cost airlines and other modes of transport. Passengers choosing the MiNi fare will not benefit

Finnair Cargo opens new Brussels base

Mumbai’s Chhatrapati Shivaji International Airport (CSIA) has given away six Kingfisher Airlines slots to IndiGo, according to reports in India. The airport will continue allotting the remaining slots to other airlines as per requirement, and it is “likely” the

Other Routes News

Finnair Cargo has used Route Exchange, the online platform for air service development, to open a new Brussels base. In March 2013, Finnair Cargo will initiate weekly flights via its new Brussels hub, connecting the Belgian capital with Finnair’s Helsinki base as well as New York JFK and a new destination, Chicago O’Hare. The network expansion follows a partnership during the latter months of 2012 with Routes’ Route Exchange business, part of Routesonline, where Finnair Cargo completed an extensive airport evaluation process to open the new Continental European base.

afm • Issue 82 – January–February • www.afm.aero

NEWS: People

On the

move Huerta appointed as FAA Administrator

The US Senate has confirmed the appointment of Michael Huerta as the new Administrator for the US’ Federal Aviation Administration (FAA). Huerta, who will govern for five years, succeeds Randy Babbitt who stepped down in December 2011. Huerta acted as interim Administrator until his own appointment was made formal. President and CEO of A4A, Nicholas Calio, applauded the move, saying: “Michael Huerta’s proven leadership and clear grasp of the imperatives of Next Gen make him the right choice to continue leading the FAA.”

Stansted’s commercial director moves to Network Rail London Stansted Airport’s commercial director, Jonathan Crick, has moved to Network Rail’s property division as commercial director of retail. The airport will not be replacing Crick until its owners complete the sale of Stansted, a spokesman said. Crick was responsible for areas such as airlines, retail, car parking and property and his responsibilities will be split between the airport’s other directors for the time being. At Network Rail, Crick will be responsible for retail and car parking. BAA, which has since changed its name to Heathrow Ltd, announced

it will sell Stansted to Manchester Airports Group, following a lengthy legal battle to keep the airport.

Virgin Atlantic appoints new CEO Virgin Atlantic has named American Airlines’ executive Craig Kreeger as its new CEO. Kreeger, 53, will take over from current CEO, Steve Ridgway, on 1 February. At American Airlines, Kreeger had a 27-year career spanning commercial, financial and strategic roles in the US and around the globe.

Airberlin appoints new CEO Airberlin has appointed Wolfgang Prock-Schauer as its new CEO. The 56-year-old has taken over from Hartmut Mehdorn, who had been in the position since September 2011. Prock-Schauer will also become an executive director on the board of directors of Air Berlin. Mehdorn also remains on the board. During his time in office, Mehdorn was responsible for establishing and successfully implementing the partnership between airberlin and Etihad Airways and for leading the airline into the oneworld alliance.

Arinc welcomes DiGeorge to its Asia-pacific operations Arinc has appointed Michael DiGeorge as managing director for its Singaporebased Asia-Pacific region.

afm • Issue 82 – January–February • www.afm.aero

DiGeorge has 25 years experience in aviation. He was previously the senior director for E-enabled programmes at Arinc’s Hong Kong office. “Mike’s extensive international experience will help lead our continued growth plans for Asia Pacific and strengthen our customers and business partners relationships in the region,” commented Arinc’s VP, Randy Pizzi.

Brenner takes control at Europe’s air safety organisation Frank Brenner joined Eurocontrol, the intergovernmental European Organisation for the Safety of Air Navigation, as its new director general, as of 1 January. Brenner has worked in air traffic management throughout his career. He will lead the agency in his new role for a period of five years. He takes over from David McMillan who was director general from 2008 to 2012.

AirAsia appoints group CCO AirAsia has announced the promotion of Siegtraund Teh to group chief commercial officer. Teh will take on the responsibility of Kathleen Tan, the current group head of commercial, who is to become the CEO of AirAsia Expedia. Teh’s main responsibility will be to manage the commercial team and deliver commercial performance improvements across the AirAsia group.

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FOCUS: Amentum

One to one: Martin Bouzaima, CEO of Amentum Right on the back of Amentum’s management buyout from its former parent, HSH Nordbank, Amentum’s CEO Martin Bouzaima, talks to us about the aircraft leasing market. Will the leasing market remain strong through 2013?

If this is the case, do you expect to see any more aviation lessors enter the market?

There is significant interest on the part of many leasing companies in the sale and leasebacks of new aircraft, but the used aircraft – and even the young used aircraft arena is more difficult. There are fewer players in that segment and financing is harder to obtain with only a few lenders playing in the space.

I think we are seeing more investors continue to consider the aviation space given its strong long-term cash flows and its low downside risk, which has been proven again post-2008. However, most new investors seem to be looking to invest in existing platforms or to participate in capital market transactions.

Despite record orders, current lease rental rates on many popular aircraft types remain below base rental rates, as defined by the appraisers. Also, there is little sign of strong positive momentum.

While some smaller lessors will likely be formed, most larger new players are more likely to invest into existing vehicles such as Sumitomo Mitsui Banking Corporation’s (SMBC) purchase of RBS Aviation, Mitsubishi UFJ’s purchase of Jackson Square Aviation, or Onex’s announced purchase of a stake in BBAM. The trend will probably be more towards consolidation of existing lessors.

Part of this is related to the fact that, while the percentage of parked modern aircraft is low, there is still a large number of available aircraft. Add to that the fact the A320 has been in production for 24 years and there are many older current generation aircraft that are not really the equivalent of today’s aircraft but that affect pricing. Still, lessors should continue to increase market share during the course of 2013, building on trends seen over the past decade. With more expensive export credit as a result of the new OECD aircraft sector understanding (ASU) some airlines that would have looked to export credit financing are likely to look more to sale and leasebacks.

What are your predictions for next year’s global economy? Will growth return within Europe and the US? We hope so. During the 4Q 2012, the OECD and IMF revised 2013’s global GDP growth expectations downward, reflecting continued weakness in the Eurozone and slower growth in the US and key emerging economies. The consensus expectation seems to be that the US will achieve modest growth – around the two per cent mark –

afm • Issue 82 – January–February • www.afm.aero

FOCUS: Amentum

British Airways is one of Amentum’s customers.

afm • Issue 82 – January–February • www.afm.aero

Image courtesy of BA.

FOCUS: Amentum as in 2012, and the Euro area will achieve marginal positive growth at best. On a positive note, there are some signs of increased consumer optimism in the US; growth levels in emerging countries are still robust in aggregate and we are hopeful the Eurozone will continue to make progress in working through its issues. The most realistic assessment at this point is probably for continued slow growth along the lines of the recent OECD and International Monetary Funds (IMF) forecasts.

How greatly will the growth markets support the west, and which country will lead this? Emerging and developing economies are forecast to grow between five and six per cent in aggregate. This will help some of the western economies as they go through fiscal consolidation and private sector deleveraging. However, judging from the current account balances, the western countries most in need of support are not necessarily the ones that will benefit. Among the large emerging economies, China continues to show the fastest and most consistent growth. There are some signs that China may be moving to become more of a consumer economy which could, over the longer term, help China decouple somewhat from the US and European markets. When it comes to our aviation markets, we are convinced deregulation will continue to help drive growth above long-term averages for any given level of economic growth in many emerging markets.

How accessible will aviation financing be through 2013 and beyond? We have no worries about the availability of financing for the new aircraft market. We expect ECAs will step back a bit given their higher pricing, with their place taken up by capital markets and regional banks. The situation is different in the used aircraft market, however, where we see a continued lack of players. This has contributed to the somewhat depressed trading activity in the used aircraft sector. But this also creates opportunities. We hear of several new players looking to provide equity – perhaps in all-cash deals – for more popular six- to 12-year-old used aircraft. So we are hopeful 2013 will begin to see a bit of a thaw in the used aircraft market.

Which aircraft are easiest to remarket and why? Liquid types with high commonality and large markets will continue to be the easiest to remarket. However, this does not necessarily translate into rentals. It may be easy to lease an A320 but market lease rates will reflect the state of supply and demand.

TUI is another of Amentum’s clientele.

What are your predictions for lease rentals next year? Assuming no further bankruptcies, somewhat improved global economic growth, and continued thawing in liquidity in the used aircraft market, we might see some slight improvement in lease rates. However, the market remains at risk from slowing economic growth, a significant bankruptcy in the northern hemisphere winter season and continued production level increases of modern types.

Will lessors’ access to unsecured financing increase and what will this do to the market? Capital markets’ interest in the sector appears to be increasing so it is likely there will be more unsecured financing available. However, it will only be available to lessors with a strong track record, who have significant scale and a credit rating of near investment grade or better.

Demand for sale and leasebacks has been strong – how long do you expect this to continue? We believe it will continue with ECAs becoming more expensive and given that most traditional aircraft lenders and banks entering the space focus on new aircraft.

afm • Issue 82 – January–February • www.afm.aero

FOCUS: Amentum

However, it may get harder for lessors to do sale and leasebacks, and to get attractive financing for them, as we get closer to last-off-the-line-aircraft for the A320/737NG and A330 lines. We would expect more 12-year deals with low residual value assumptions as we get closer to the introduction of the new technology aircraft.

Which aircraft do you see demand for and what plans do you have for your own fleet? We see continued demand for popular narrowbodies and strong demand for new technology aircraft with significant fuel savings, such as the 787 and the A350. Strong demand will continue for the 777-300ER as a replacement for 747-400s. Our own growth depends on our investor customers and whether they want to grow. We will be looking for new opportunities to help investors enter the aircraft leasing space.

Tell us more about the management buyout of Amentum from HSH Nordbank. We had a very successful year in 2012 at Amentum, managing portfolios with a total of 50 aircraft and adding two more financial institutions to our growing

customer base. A major milestone for the company was the successful completion of the management buyout just before the end of 2012. This saw former owner HSH Nordbank transfer 100 per cent of the shares in the company. Amentum is now an independent and dedicated third-party service provider: We have a great team across all functions, a state-of-the-art infrastructure, and a very strong track record in third-party aircraft asset and investment management and bank advisory, such as aircraft repossessions and divestments for lenders. As HSH Nordbank is exiting the aircraft financing space as part of a major restructuring following the financial crisis, it was a natural decision for us to make Amentum independent to further develop and grow this successful platform. We continue to provide our services to all existing financial institution customers and we are mandated by HSH Nordbank as its global service provider and exclusive remarketing agent for the long-term divestment of all HSH Nordbank owned aircraft. Apart from that, we are working on several new projects and are optimistic we will add further customers for our third-party asset and investment management and our bank advisory services during 2013.

afm • Issue 82 – January–February • www.afm.aero

FLEET OPS: Cargo review

Ensuring cargo growth: A heavy load to carry

Martin Roebuck examines air cargo operators as a means to assess the market and discover whether those green shoots of growth have wilted.

viation is seeing some slow and measured growth. Start-up passenger airlines are entering the market, and existing passenger carriers are noting slightly improved passenger figures, but, are we really on the up? Air cargo is a strong indicator of global trade and GDP, and the industry is suffering from weak demand and a lack of investment. Boeing remains as upbeat as ever. In its World Air Cargo Forecast for 2012/2013, the manufacturer predicted 5.2 per cent annual growth for air cargo over the next 20 years. It bases this assessment on a near-doubling of world GDP over the period, supported by the liberalisation of the air transport market, better infrastructure and improved aircraft technology. However, many observers doubt whether this is achievable. They argue that a massive influx of new air capacity, high oil prices, demand for sea freight and the increasing dominance of the Middle East will keep air cargo’s main

players (in Europe, North America and south-east Asia) under intense pressure. IATA figures show a 1.9 per cent decline in airfreight volumes from September to October. Tonnage was 3.8 per cent down during October 2012 compared with the previous year. Members of the Association of Asia Pacific Airlines (AAPA) recorded a 5.8 per cent fall year-on-year in October. Andrew Herdman, AAPA director general, said: “Global air cargo markets are still depressed, with volumes for the first 10 months of the year four per cent down on last year’s levels. Overall, the air cargo market is characterised by weak demand and excess capacity, maintaining downward pressure on rates.” He added that low consumer confidence in Europe and the US is particularly affecting Asian carriers, which still account for around 40 per cent of international air cargo traffic.

afm • Issue 82 – January–February • www.afm.aero

FLEET OPS: Cargo review How airlines are faring Reflecting a general trend in air cargo, Cathay Pacific’s traffic (measured by freight tonne-kilometres, or FTK) dropped by more than nine per cent in the 10 months to October 2012. This figure continued to shrink in October, although tonnage showed a small increase, reflecting the greater importance of regional traffic. James Woodrow, Cathay Pacific’s general manager for cargo sales and marketing, said: “We saw a small uptick in demand in October, driven by the launch of a number of new high-tech consumer products. However, in the longer term, demand from Asia to Europe will continue to be affected by the economic fragility in a number of Eurozone countries.” Cargo’s contribution to Cathay Pacific’s overall revenue (once as high as 28 per cent) is likely to fall to around 20 per cent this year, despite the airline’s intra-Asia freighter services and new services to Chennai, Colombo and Zhengzhou. Cargo is also an important component of passenger routes such as Hong Kong-Hyderabad, which was launched in December 2012.

Air France-KLM, Europe’s largest cargo carrier, reduced its capacity by 2.9 per cent in the first nine months of the year but volumes were down by 6.5 per cent, meaning the load factor fell to 63.6 per cent. Lufthansa Cargo saw an even bigger loss of 8.5 per cent in the year to September. The headline numbers were better at IAG Cargo with a decrease of 0.8 per cent in the year to October, but this group figure disguises a massive contrast in fortunes between British Airways (up 2.6 per cent) and Iberia (down 13.1 per cent). Addressing a press conference at London Heathrow, David Shepherd, global head of sales at IAG Cargo, said: “Peak season has been stronger than expected and yields have hardened.” Must-have technology such as smartphones and iPads were not the only popular goods this year; fashion items were also very desirable. With shippers relying on surplus scheduled capacity, Shepherd believes that the lack of charter activity may have boosted load factors during the peak season. However, he is not confident that the recovery will last beyond the Chinese New Year in February.

Andrew Herdman, AAPA director general

Global air cargo markets are still depressed, with volumes for the first 10 months of the year four per cent down on last year’s levels Things also look bad for Singapore Airlines (SIA) Cargo, which is parking one of its 13 747-400 freighters from January as its markets worsen. In the six months to September, SIA Cargo made an operating loss of $81m – more than three times the previous year’s figure.

Established players in decline

Tan Kai Ping, president of SIA Cargo, explained: “The air cargo market remains badly depressed and the near-term outlook continues to be challenging. Freight rates have declined to a level where certain flights are no longer viable.”

Emirates, however, recorded a 10.7 per cent increase, and according to Otto, “is not going to stop soon, with so many aircraft on delivery”. Air China had increased by five per cent over the period and the figures for AirBridgeCargo and Turkish Airlines (albeit from a lower base) were even more startling at plus 25.5 per cent and plus 36.7 per cent respectively.

The carrier acknowledged that it faces increased competition from Middle Eastern carriers on its European routes. Indeed, according to IATA, Middle Eastern airlines achieved a 13.4 per cent increase year-on-year during October 2012. The downturn in Asia - where even mainland Chinese airlines such as Air China and China Eastern are losing international volume – is mirrored in western markets. In the US, Delta Air Lines’ cargo traffic was broadly flat for the first 10 months of 2012. American Airlines saw a decrease of 1.9 per cent and United Airlines (now including Continental) was 6.8 per cent down.

Speaking at a presentation in Frankfurt, Andreas Otto, executive board member for product and sales at Lufthansa Cargo, said most legacy carriers’ FTKs have stayed broadly flat over the last five years.

“Only new players are in expansion mode,” Otto said. He blamed European governments for failing to support their airlines, unlike those in developing markets, and said the night flight ban at Frankfurt would cost Lufthansa Cargo €40m ($53m) per year. Larry Coyne, CEO of all-cargo carrier, Coyne Airways, believes the problems confronting European passenger airlines will see them withdraw from the long-haul freighter business completely over the next five years, which will benefit niche operators.

afm • Issue 82 – January–February • www.afm.aero

FLEET OPS: Cargo review

“The combination carriers have suffered a series of setbacks including 9/11, SARS, the volcano dust cloud, and most seriously, price-fixing charges,” Coyne says. “They will increasingly concentrate on passenger cargo services, and the owners of long-range freighters – like the 747-800 – will need niche carriers to help them optimise loads. We can tap into local hubs where a single destination is not able to support a freighter operation.” According to Coyne, established airlines will experience competition from many directions: Airlines from Asia and the Middle East will start to dominate the long-haul market; express operators will target heavy cargo and new markets; and smaller, more agile carriers will control specialist regional markets. He predicts a “new world order” in air cargo against a background of weak economies, increased competition and falling yields. Coyne also thinks shippers will revert to transporting their goods by road, though IATA figures confirm that after falling in 2011, ocean freight increased its share again in 2012. This trend is apparent even among the developing BRIC countries, which have been predicted to save the global economy and buoy airfreight. For example, according to recent statistics from the OECD’s International Transport Forum, Brazil is now the sixth-biggest economy in the world; its exports by sea remain strong, although the country’s air imports and exports slipped back this autumn to below their pre-crisis peak in June 2008. Even Emirates (whose global volumes during the first half were 16 per cent up on last year) is finding the market tough.

The carrier operates three freighter operations a week from Dubai to Viracopos, in Brazil via Frankfurt and Dakar, in Senegal. “There’s a big drop in Europe-Brazil traffic,” says Ram Menen, senior divisional VP of Emirates SkyCargo. “It’s a big route for automotive components, but it’s taking a real beating because of increased taxes.” A survey of 300 shippers and freight forwarders carried out in November by investment management company, Stifel, Nicolaus & Co together with the UK market analyst, Transport Intelligence, showed that more than 80 per cent of companies operating on the Europe-Asia and Europe-US trade lanes are shifting from air to ocean as a means to transport goods. Most respondents said they expect air import volumes into Europe to decline further over the next six months. Two major global forwarders confirm the reality of this modal shift. Rubin McDougall, CFO at CEVA Logistics, says ocean freight revenue rose in the three months to September 2012 despite flat volumes – suggesting a firming of rates. Meanwhile, airfreight revenue shrank in line with a “high single-figure decline” in volume. CEVA customers are now using airfreight to support product launches or as a standby in case of production line failures, McDougall says. They are also accepting longer transit times for routine shipments. In a recent earnings conference call, Eric Kirchner, CEO of UTi Worldwide, revealed that airfreight tonnage fell 12 per cent during the third quarter, and despite there being “no appreciable peak season” this year, he confirmed that ocean freight tonnage matched last year’s figures. Shipments of

afm • Issue 82 – January–February • www.afm.aero

FLEET OPS: Cargo review

silicon chips – a segment in which fluctuations closely match those of airfreight – were down, and clients were turning to the less expensive mode of ocean freight. Traditionally, UTi is weighted towards air, but Kirchner says: “Ocean has the potential to grow more consistently over a longer period of time. We think that it’s prudent to plan for no growth in airfreight tonnage next year.”

Eastern promise The Gulf region has witnessed a decade of relentless aviation growth, supported by a massive airport construction programme. Middle Eastern carriers are transporting an increasingly large portion of airfreight – indeed their volumes are growing at a double-digit pace. It appears that restrictions to air traffic will be the only constraint on capacity growth. Emirates now flies to 126 destinations (up from 114 last year) in 74 countries. It has 191 aircraft in operation and a further 209 on order. Location is everything, Menen says. The Middle East links the huge, growing economies of China and India with major markets to the West, while the Gulf’s economy is also expanding quickly. High-yield cargo from China and the rest of Asia is still weak however, but exports to Africa, the Middle East and the Indian subcontinent are encouraging. Qantas’ termination of its long-standing alliance with British Airways, (in favour of a new tie-up with Emirates), will see Qantas move its long-haul hub from Singapore to Dubai from March. The agreement underlines the growing influence of the Middle East as a hub between established east-west and north-south markets.

Emirates will gain access to around 50 Australian and Pacific destinations, while Qantas’ CEO, Joyce, believes Emirates’ presence in 30 European markets, and the strength of its network across the Middle East and North Africa, is crucial. “The world has changed since 1995 when the joint business started... this is a small part of our overall network and this move fits in with changes in our global strategy,” Willie Walsh, CEO of IAG, acknowledged. IAG is now more focused on Asia and analysts have speculated that a deal with Qatar Airways would give the group much needed connectivity to Asian and Australian destinations. The global decline in air cargo has not been fully matched by capacity cuts. Older, more fuel-hungry freighters may have been grounded for the time being, but according to IATA, load factors have declined for two years and are now below 45 per cent. Large numbers of new freighters are on order, but the increased cargo capacity of newer passenger widebodies is also a major factor. The A380 may not be particularly cargo-friendly, but a 777-300ER can transport 15 tonnes of cargo bellyhold, double the capacity of a 747-400. The 747-800’s cargo payload is 26 per cent higher than the -400. The effect on yield will be all too predictable. Despite numerous orders, it appears air cargo operators have not reached the clear skies they had dreamt of. The industry is all too familiar with the cycle of growth; routes will be adapted or suspended and services altered to bend to demand. One way or another, tiny shoots will find their way through the dirt.

afm • Issue 82 – January–February • www.afm.aero

Finding it hard to locate the latest aviation news?

Then visit the AFM website is no w

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INCLUDING:  Aviation news  Executive interviews  Aircraft and engine leasing  Orders, deliveries and financing

 Aviation analysis and forecasts  MRO trends  List prices, lease rates and engine values And much more...

Update

AFM will be reporting live from ISTAT Americas in March, which you will be able to follow via our website. Contact Ellis Owen

Sales manager for AFM E-mail: ellis@afm.aero Direct line: +44 (0) 208 831 7519

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AFM Editor E-mail: mary-anne@afm.aero Direct line: +44 (0) 208 831 7511

www.afm.aero

FLEET OPS: 50-seater

Farewell, the 50-seater Thomas Reich, director of air service development at AvPORTS, reports on the demise of the once much-loved 50-seat regional jet.

ith US domestic airlines parking large numbers of their relatively new 50-seat regional jets fleets in favour of larger aircraft, many are asking the question: ‘how did we get here?’

To answer this question, we need to take a step back. Prior to the terrorist attacks on September 11, 2001, the US economy was strong, airline demand was continuing to grow, fuel prices were low and larger regional jets were just entering the market.

All hail The effect was that in 2001, the 50-seater regional jet was king – US airlines clamoured to get as many of them in their regional fleets as possible, signing long-term operating agreements with regional partners to operate them. Many of these agreements were referred to as ‘fee-perdeparture’, ‘capacity purchase’, or ‘cost-plus’ meaning that the regional carrier received standard fees to operate

flights on behalf of major carriers, in turn the major carrier retained all passenger revenue generated by the flight. These contracts often stipulated that fuel costs would be met by the major carrier operating the flight. Today, fuel prices are at record or near record highs, 50-seat regional jets are getting older and are ready for some very expensive heavy maintenance, and there is now a plentiful supply of larger regional jets that seat anywhere from 66 to 99 passengers. As a result, the economics of the 50-seat regional jet are no longer sustainable in most of the markets the aircraft operates. Airlines now prefer newer, larger and more fuel-efficient regional jets due to these improved economics. Unfortunately, many carriers cannot find enough aircraft to fill the loss of hundreds of 50-seat regional jets, which is forcing many carriers to continue flying large numbers of the jets despite the type’s subpar economic performance.

afm • Issue 82 – January–February • www.afm.aero

FLEET OPS: 50-seater

Birth of the regional jet In the 1990s, the Canadair Regional Jet and E145 ushered in a new era in commercial aviation, providing airlines with the opportunity to operate in markets that were too small to support larger mainline equipment, thus allowing carriers to bypass congested hubs while providing more passengers with non-stop flight options. As regional jets continued to infiltrate commercial aviation, airlines found more ways to use this new aircraft. Soon regional jets replaced mainline aircraft in certain markets, and offered increased flight frequencies without increasing the number of seats available for sale. Airlines were drawn by the allure of jets replacing turboprops, serving longer stage ‘thin’ markets and increasing frequency to attract more high-yield business travellers. The introduction of the 50-seat regional jet forever re-shaped the route maps of airlines around the world. Now, as these aircraft are phased out of service, portions of the commercial airline network are likely to revert back to their previous form.

In a recent case with Delta Air Lines, a large replacement fleet became available when Southwest Airlines publicly stated that it did not want the 88 717-200s it was acquiring as part of its merger with AirTran Airways. Delta capitalised on this opportunity to fill a large portion of its 50-seat regional jet fleet with a mix of these 717-200s, which are being flown as mainline with Delta crews, and larger regional jets. An expanded scope clause with mainline pilots made this possible allowing the carrier to phase out 218 50-seat regional jets within the next five years. Looking forward, more airlines will transform their regional fleets in much the same way as Delta. High fuel prices are a reality that is not going to change. Airlines have acknowledged this and are shaping their regional fleets around aircraft that can provide the most fuel efficiency to the carrier.

Today’s solutions

As a result, we will continue to see airlines replace 50-seat regional jets with larger regional jets, smaller mainline aircraft and even turboprops such as the Q-400, ATR-42 and ATR-72. The choice will depend on which aircraft provides the most cost effective way to move passengers through their network.

As carriers search for aircraft to replace their 50-seat regional jets, most are simply turning to larger regional jets. Scope clauses within mainline pilot contracts normally have limitations regarding the number of large regional jets that a specific carrier can fly, which makes replacement of these 50-seaters all the more difficult.

There are still markets where a 50-seat regional jet can successfully operate; however, those markets are few and far between. Over time we will see markets currently flown by 50-seat regional jets expand considerably as they transition to larger aircraft, or disappear having simply been cancelled.

afm • Issue 82 – January–February • www.afm.aero

FLEET OPS: Freighter conversion

Freighter conversions Kevin Casey, president of Pemco, delivers his insight into the freighter conversion market and explains why he’s optimistic about the future.

ummarising the current freighter conversion industry is no easy task. Yet, when words fail us, sometimes those of history’s great writers still ring with meaning today. So let’s let Dickens summate: “It was the best of times and it was the worst of times.” Nothing could be truer of the conversion market over the past few years. To understand this, let us start with some of the background. Much has been made of the thin demand for international airfreight and excess capacity in the widebody market. This, in turn, has led to continued weak demand for widebody conversions. And with a significant upswing in global GDP nowhere in sight, odds are slim that cargo operators will benefit from a global recovery any time soon. It is well understood that cargo demand closely correlates with global GDP and foreign direct investment. Things have

recovered slightly since the massive contraction in 2008, but it has slowed due to the recession in Europe, a 35 per cent cooling of China’s growth rate and the generally uncertain global economic outlook. Additionally, waning demand is compounded by ageing widebody fleets, though pockets of the regional narrowbody freighter market have fared much better than their widebody freighter counterparts. This is despite the threat of slightly weaker yields per segment, a much higher operating cost environment and freighters flying long past their economic prime. Meanwhile, 737-300, 737-400, MD80 and periodically 757 programmes are making the news, with strong demand reported for the 737-300/400. Here at Pemco, demand through 2013 for 737-300/400 freighter and combi/quickchange products could double compared with typical volumes. With a backlog of 40

afm • Issue 82 – January–February • www.afm.aero

FLEET OPS: Freighter conversion each freeing younger 737-300/400s into the feedstock and substantially driving down prices. This is likely to continue. If you are in the market, be sure to get the right aircraft. Younger aircraft are more desirable in terms of maintenance costs and reliability, but aircraft with a high gross weight, or that can be upgraded, will serve you better. Regarding demand, 10- to 15-year-old narrowbody freighters are rapidly being deployed to sustain new markets within developing economies and to replace ‘dinobird’ aircraft, which are too old to meet the latest government-mandated age safety-driven standards. Until recently, only the oldest 737-300s were readily available at the rock-bottom prices required by most under-capitalised start-ups and operators at the far corners of the globe. Today, carriers are taking advantage of low prices by also buying 737-400s. These prices are approaching liquidation value in some instances. These narrowbody cargo operators are gaining utility and efficiency for their effort. So much so that one of Pemco’s two-ship customers recently reported earning $10m profit through the last 12 months. This sort of performance is inspiring imitators; indeed a growing number of new cargo carriers are taking advantage of their competitors’ continued reliance on 727s and other ‘Jurassic’ aircraft by rolling out converted Classics – increasingly 737-400Fs. They are betting on forecasts for high freighter demand and an average five per cent increase in air cargo traffic, which both Boeing and Airbus predicted in their annual 20-year market studies (which admittedly are notoriously optimistic, particularly for widebodies).

conversions in a market where deals are taken close to the conversion date, we expect this demand to continue through to at least 2015.

Boeing, Airbus and the Air Cargo Management Group (ACMG) have each forecast an excess of 1,000 narrowbody freighters over the next 20 years – nearly all of which will be passenger aircraft conversions because Boeing and Airbus will likely build just a handful of military variants.

Classics versus Jurassics Demand for freighter conversions So what is driving the swelling demand for 737-size freighters and is it translating to the venerable 757 and other freighter programmes? On the supply side, the 737-300, and more recently the 737-400 passenger-to-freighter (P2F) conversion programmes, are benefitting from distressed market conditions. These conditions are driven by short-term realities together with the long-term market outlook for the regional air cargo industry. Volatility in air passenger numbers, record aircraft deliveries, accelerated re-fleeting, and legacy fleet liquidations are

So how does the Classic conversion compare with less youthful alternatives and how will the global narrowbody freighter fleet develop? On fuel alone, the indications are pretty compelling. The table overleaf compares three common narrowbody freighters on a typical 500 mile route flown 1200 hours per year, and shows that the 737-300/400 saves $3m a year compared with the 727. But there is more to the story. The 727-200’s three JT8D engines and three-man flight crew compares with just two for the 737 or 757. And while acquiring an older freighter requires minimal capital, cash operating costs are 50 to 60 per cent higher than a typical 737-300/400. In total, the

afm • Issue 82 – January–February • www.afm.aero

FLEET OPS: Freighter conversion

Narrowbody flight statistics

727-200 737-200 737-400

500 nm 2,100 USG $7,035.00 $2,512.50 $3,015,000

Example trip length (approx 1.2 flight hours) Approximate total fuel burn over 500 nm trip Estimated Jet fuel costs (@ $.35/USG) 737-400 Approximated fuel savings per hour 737-400 Jet fuel savings per year (based on 1,200 flight hours/year)

737-300/400F and 757 have lower costs per ton-mile for a typical payload than older competitors. Admittedly, older aircraft can sometimes make economic sense on infrequent operations and on routes with consistently high volumetric loads, but the 737-300/400F, along with most classic freighters, has such a fuel cost advantage, lower maintenance and crew costs, higher reliability and payload versatility, that it is easy to see why operators with adequate cash or credit are lining up for Classic narrowbody freighter conversions.

Looking forward So, which narrowbody aircraft should a start-up carrier select? As discussed, the 737 Classic is certainly among the most viable, cost-efficient and affordable narrowbody

500 nm 1,500 USG $5,025.00 $837.50 $1,005,000

500 nm 1,200 USG $4,020.00 N/A N/A

freighter option at this time. But the 14 to 15 pallet 757-200 has some efficiencies over the nine to 11 position 737-300/400, provided the routes can support the higher payload/volume and longer flight segment, which favour the 757 and high payload orientation. Precision Conversions and ST Aerospace certainly have well-engineered 757 products. If the 757F fits your application (route/stage length/payload), you probably cannot go wrong. But given that, why are there currently so few deals for the 757? This is perhaps because the aircraft type still needs operators and these are slow to develop. Additionally, second and third tier operators are waiting on the sidelines for an abundance of cheap 757s, but these are not arriving fast enough. Unfortunately, engines and shop visit costs are killing the 757 PTF business.

afm • Issue 82 – January–February • www.afm.aero

FLEET OPS: Freighter conversion

Pemco in the year ahead Although the roaring 1990s, when Pemco converted about 100 727’s for FedEx, are long gone, the future is still exciting. In fact, early this year, we will convert our 100th 737 Classic – a 400 Series 11-position high-yield freighter. It will represent the completion of a year-long process to exit the company’s old legacy operations in Alabama, and position it as a debt-free company with a strong orderbook. All MRO and PTF operations will be primarily located at the company’s modern on-line MRO base in Florida. In the near future, Pemco will announce some exciting new PTF programme developments to compliment two significant new maintenance programmes with a US flag carrier and a prominent low-cost carrier.

The 757 is a phenomenal aircraft and a real workhorse, but it is too much for most short-haul regional routes, particularly given large express integrators’ frequency objectives and many express freight carriers’ typical load size. Conversely, it is too small to meet the need for jumbo freighters on long international routes. Compared, however, with the 737, the 757’s high capital costs typically drive lower gross margin performance unless they are flying longer routes with very high utilisation. Therefore, the vast majority of all converted 757-200s are in service with major international carriers and provide special express service within the US and Europe.

But what is so different about the 737-300 and -400 converted freighter and why, after 21 years in service, has the 737 Freighter become desirable? Given the gradient of the uptick in demand, one may well ask whether this interest is sustainable. The answer is that the demand is real and should be here for a while. The real surge in demand for the 737-300/400 Freighter is the combination of eight years’ worth of steady markets combined with new demand from developing economies. China continues to be important in this market – particularly for Pemco where eight out of 10 narrowbody freighters are Pemco aircraft. Here, together with HAECO Group (primarily STAECO), Pemco has converted about 35 aircraft since 2005. China’s love for the 737 has caught on all over Asia and has spread to South America, Eastern Europe, Turkey and Russia. These emerging markets account for conversion companies’ growing backlogs. This is led by increasing demand for high-value and time-sensitive, low-density goods, such as: electronics; pharmaceuticals; auto and industrial parts; seafood and flowers. In addition to this, manufacturing is moving away from expensive cities in favour of remote and inexpensive production centres. Narrowbody freighter demand has benefitted in these regions because goods need to be rapidly moved from the manufacturing plant to ports and to market. Most developing countries do not have the road infrastructure to do this, so air cargo is often the only solution for fast, secure and reliable transportation of goods.

afm • Issue 82 – January–February • www.afm.aero

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MRO: Recycling

One man’s rubbish: Aircraft recycling Martin Todd, AFRA’s communications manager, takes us through recent developments in the aircraft recycling and disassembling sector.

t has been a challenging year for those involved in aircraft disassembly and recycling. Players have had to engage in ever more creative solutions in order to make the market work for them.

Different strategies have emerged as the end-of-life sector struggles with the economic downturn and the changing profile of aircraft favoured for dismantling. According to Derk-Jan van Heerden, general manager of Aircraft End-of-Life Solutions (AELS), industry players are now more focused on finance and investment opportunities. “A major development in the market this year has been the strategic removal of aircraft from service, with companies

making strategic investments rather than just waiting for an aircraft to come to the end of its service life,” he says. Aircraft dismantlers used to wait for an aircraft to reach 20- to 25-years-of-age, fall out of active service and be parked. Heerden notices that: “Dismantlers are now purchasing younger, more expensive aircraft, which they believe offer them more opportunities. Everything has become more professional, as dismantlers seek out, say, particular landing gears or avionics, which they know there is a market for, rather than just wait to see what comes along.” “If you are purchasing an aircraft for say $20m, you are going to be much more careful in choosing who carries out

afm • Issue 82 – January–February • www.afm.aero

MRO: Recycling

Aircraft age: More than just a number With fuel-burn accounting for up to 40 per cent of an airlines’ operating costs, aircraft are leaving service at a younger age and being replaced by newer, more fuel-efficient models. A number of countries, the latest being Indonesia, have introduced restrictions affecting the age of aircraft allowed to operate from or in their country. Effectively, this means that aircraft of around 18 years or above are no longer accepted in certain markets. Operators in these countries will now favour younger aircraft, meaning another swathe of aircraft will be pushed to their end-of-life and denied the secondary markets. Industry experts are largely in agreement that the number of aircraft available for teardown will increase significantly in the coming years. Speaking at AFRA’s annual meeting in July 2012, Larry Schneider, VP for development at Boeing Commercial Airplanes, said he expected “the number of airplanes leaving the global fleet to nearly double in the next decade”. This is up from a rate of close to 400 a year. The Boeing executive said accelerated fleet replacement would “rapidly increase the demand for aircraft dismantling and recycling services and introduce unique challenges to the sector”. According to Bernard Comensoli, CEO of Research & Business Development and AFRA board member: “More attractive financial conditions for new aircraft, as well as a greater demand for more fuel-efficient and environmentally proficient aircraft, have effectively lowered the service life of older aircraft by two to three years.”

To part-out or not to part-out One of the major challenges for those in the aircraft dismantling and recycling sector is to convince asset owners that an aircraft has reached the end of its working life.

Chateauroux Air Centre in France.

your teardown of such a valuable asset,” continues Heerden. This trend has benefitted members of the Aircraft Fleet Recycling Association (AFRA), particularly those who are accredited, in that they have both a reputation and certification affirming that they dismantle and recycle aircraft according to best industry practice and in an environmentally sensitive manner. Since its formation in 2006, AFRA has championed best practice in aircraft dismantling and recycling through a series of best management practice (BMP) guides. Currently 21 organisations have received AFRA accreditation, having been appraised by an independent auditor.

As CEO of Aircraft Demolition and an AFRA member, Tim Zemanovic, notes: “I’ve had to argue that it makes no sense to continue paying extortionate parking fees and insurance costs, while the asset slowly but inevitably, diminishes in value. It can be hard to accept that an aircraft that you think is worth a couple of million dollars may now only be worth a couple of hundred thousand dollars.” According to Karl Rickard, CEO of Powerjet Aviation and fellow AFRA member: “Only when aircraft are advertised without engines is there a semblance of acceptance from owners that this aircraft is an end-of-life asset. But, in truth, there are growing quantities of aircraft that fit both the age profile and the maintenance status. That places them in the hot zone for teardown.” How aircraft owners can be encouraged to come to terms with these uncomfortable truths remains a challenge.

afm • Issue 82 – January–February • www.afm.aero

MRO: Recycling A number of factors go into deciding whether to disassemble an aircraft aged 20 years and over. For example, how many service years does the aircraft have? Will it need a heavy C and D check and if so, will these costs be recuperated when leasing or re-selling the aircraft? Zemanovic notes: “Every aircraft is different; it depends what equipment has been installed. The avionics might have been upgraded, which adds value. They may have been fitted with all-weather radar. Each aircraft has to be taken on its own merit. You have to know your market, know what is in high demand and more importantly, know what is not.” In the past year, there has been a noticeable change in the profile of aircraft types favoured for dismantling and recycling. Traditional favourites such as the classic 737 have fallen out of favour and have significantly dropped in price. Market experts claim you can now purchase a 737 Classic without engines, for around $100,000 to $200,000, which is less than half the market price two years ago. Older A320s are not as popular a choice for dismantling as they once were, yet they have an enduring appeal. Many are fitted with parts that have been upgraded over the years. These parts are valuable in that they can be fitted on to the younger model A320s and with minimal repair, they can also be re-certified and can re-enter the parts market. “There will always be some parts that are worth their weight in gold,” claims Rickard. “You need to buy the right aircraft at the right price as well as knowing how to manage the repair cycle of the valuable parts that you remove from the aircraft. So investment in the component repair can be crucial.” In terms of widebody aircraft, dismantlers’ talk of older 747’s as having potential for disassembly, even though their price has fallen to around $3-4m. The availability of both 737 Classics and older A320s for teardown has become more prevalent. Yet, AELS’ Heerden explains that this can present difficulties as well as opportunities. “It’s true that there are more aircraft available for parting out, which has led to a drop in prices for certain types of aircraft and also for parts from these aircraft, which makes these less attractive to dismantlers.” “I would estimate that in certain cases, prices for parts have dropped by more than 20 to 25 per cent over the past year. In this climate, parts distributors don’t want to be sitting on a stock of parts for two to three years,” states Rickard. When an aircraft type is first disassembled one can expect to retrieve around 1000 parts from each aircraft. However, as time passes and more of these aircraft are dismantled, it makes less economic sense to strip many parts as the

AFRA’s role in aircraft recycling The sector is noticeably concentrating on the whole dismantling and materials recycling chain, with greater focus on the recycling of aircraft materials. This has brought AFRA’s new Best Management Practice (BMP) Guide on recycling aircraft materials to the fore. AFRA’s latest BMP Guide covers the whole of aircraft dismantling and recycling – from the disassembly of engines and parts through to the recycling of aircraft materials, taking the aircraft from its final flight to the full recycling of the fuselage in an environmentally responsible manner. According to AFRA’s executive director, Martin Fraissignes, the complete set of AFRA BMP Guides show an industry acting responsibly, taking environmental excellence and sustainability seriously in all aspects of aircraft dismantling and recycling. “Now all the BMPs have been published, industry and the market can be guaranteed that strict, professional and responsible aircraft disassembly will take place along the whole process of teardown. This is why companies increasingly insist on dealing with AFRA-accredited members when they issue tenders on aircraft that have reached the end of their service life.” The new AFRA BMP Guide profiles issues that are crucial to the market, such as: • Safeguarding materials • Ensuring that parts are properly mutilated when they leave service meaning they will not re-enter the market through the illegal sector • Guaranteeing that aircraft materials are properly separated and segregated to ensure maximum purity of material grades • Appropriate handling of hazardous materials. Awareness of these and other crucial issues helps encourage greater accountability in the industry as a whole, leading to more environmental responsibility from both operators and customers. As AFRA moves forward it will intensify efforts to engage with regulatory bodies such as the FAA and EASA in terms of promoting best practice. It also intends to play a more active role on the aviation scene as a whole, promoting AFRA values and solutions in a host of settings from ICAO to IATA, ATAG, ISTAT and others, creatively educating the industry and the broader aviation sector on the importance of environmental vigilance and sustainable best practice in the aircraft end-of-life arena.

afm • Issue 82 – January–February • www.afm.aero

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MRO: Recycling

Source: Aircraft Demolition.

demand is not there. Indeed, it is estimated that only half the parts will now be recovered from older aircraft. Take the classic A320. It no longer makes sense to remove the parts that are hard to access when you may already have 10 of these in your warehouse. You are much more likely just to remove the high-value parts, to which you have relatively easy access.

The total package “It is not necessarily the number of aircraft available that is making the difference in the sector, it is the type and ‘quality’ of the aircraft that is increasingly seen as the key to this sector thriving,” confirms Zemanovic. Today, players are being more strategic by targeting younger aircraft that offer more economic opportunities. Increased competition in the sector also means that players have out more niche markets and more challenging opportunities. However, financing becomes much more of an issue when targeting younger aircraft, hence the emergence of specific financing tools to support the aircraft end-of-life sector. Purchasing one of the younger aircraft (which are more sought after because of their engines and parts) can cost upwards of $10m. One particular specialised fund is Aeronautics Fund, which purchases aircraft for dismantling and recycling.

“The prices for these younger aircraft can be high, but so can the returns,” says RBD’s Comensoli. But if you are competing with cargo companies that want to convert aircraft into freighters, then you need financial companies like Aeronautics Fund to purchase these more expensive assets, enabling them to be dismantled by recognised AFRA members. “You need to know what parts people want to buy; you need a certain amount of expertise. All our people have a long history of working in the aviation sector, which means they know the business, they know the markets. This is not always the case, especially when you get to the aircraft materials side of things,” says Zemanovic. AFRA members highlight market response to packages that cover all aspects of disassembly and recycling. For example, Aircraft Demolition have developed a business model whereby they offset the cost of a full dismantle by offering credit on the monies received from tearing down and recycling the metals from the aircraft fuselage. Traditionally, the model has entailed one company specialising in removing and dealing with the engines, another with the major parts and a third with the recycling of aircraft materials. To what extent these new ‘total’ packages are becoming the norm is unclear but it is obvious that the market as a whole is developing in many interesting ways.

afm • Issue 82 – January–February • www.afm.aero

TLF: Operating leases

Operating leases: Their role in today’s market

Leasing experts at Boeing’s aircraft manufacturing headquarters in Seattle discuss the fundamentals of commercial aircraft leasing, its recent growth and the crucial role that lessors play.

urrently more than 36 per cent of the world’s airline fleet is leased and that is set to grow to half by the start of the next decade. Boeing Capital Corporation believes that lessors play a crucial role for airlines and aircraft manufacturers such as themselves. Aircraft leasing is growing in popularity. This is because airlines general find it hard to maintain the high profits needed to purchase aircraft outright. Carriers are working hard to keep themselves liquid and to keep their obligations off their balance sheets.

Aircraft leases typically come either as a ‘wet lease’ (where leasing firms provide the aircraft, crew, fuel and other operating considerations) or a ‘dry lease’ (consisting of only the aircraft itself). Either way, the lessee turns to a lessor to provide the aircraft for a fixed period of time, after which its obligations end, and the aircraft is typically redeployed elsewhere. While leased aircraft can be found in the fleets of major operators and low-cost start-ups, the concept is most appealing to operations where capital costs are challenged.

afm • Issue 82 – January–February • www.afm.aero

TLF: Operating leases strategy. That, versus buying, is incredibly attractive to someone who’s developing a new entrant product,” Collins explains. Beyond the role of providing the aircraft and related services, leasing firms often bring other financial and consultative services to the lessee. “Some leasing firms also are in the position to act as major financing companies, providing capital as well for brick-and-mortar projects, engine financing and other airline uses. Also not to be underestimated is the sale and leaseback role that leasing companies play, whereby they buy back aircraft on delivery to provide operators with capital. “Lessors often offer flexibility along with their other financial services, which provides an operator with broader benefits. The part we do not like to readily admit is that from their experience with multiple operators, lessors are probably not a bad sounding board on the best products, and how best to get support from the OEMs. They become consultants in terms of helping those decisions, and this becomes attractive to operators,” says Collins.

Lessors as OEM customers Since entering the scene over the last few decades, aircraft leasing firms have increasingly exercised their influence over aviation market considerations and conditions. One role that lessors play is to use their diverse customer base (often with customers not in the position to purchase directly from the OEM) to help establish a market presence for new commercial aircraft products. But do the airframers welcome the benefits and support offered by the leasing community? Is it an adversarial or advantageous situation, and do the manufacturers care whether they sell directly to airlines, rather than dealing with leasing firms?

“If you’re a new entrant, and you’re not widely capitalised and don’t have the ability to pay pre-delivery payments or the debt cash to optimise your operation, a lessor product becomes really attractive,” says Bill Collins, VP for leasing and asset management sales at Boeing Commercial Airplanes, the US-based large commercial aircraft manufacturer. “Leasing holds your capital costs down. It gives you the business-plan flexibility to make sure the product you chose and the approach you’re using are efficient. And if they’re not, you have the ability to figure out an exit

“Lessors are a function of financing and distribution of your product, but unless you establish a customer base, and convince the base that yours is a superior product, it’s tough to have one without the other,” says Boeing’s VP of leasing, Collins. “At the end of the day, once we’ve established our product and the key value components of our story, we recognise the lessors’ ability to work with us, and the additional advantages they can bring to a campaign. The fact is, there are very few campaigns today that don’t include both a direct buy and lease content. In fact, as our sales teams would tell you, whether it’s a direct placement or a lease product, if we win, we’re indifferent,” Collins discloses.

afm • Issue 82 – January–February • www.afm.aero

TLF: Operating leases

The development of operating leases From its inception, leasing has increased to represent more than a third of today’s worldwide fleet. By 2020, it is expected to represent about half. By Boeing’s estimate, there are currently more than 150 lessors serving more than 700 customers in some 140 countries worldwide. It also estimates that lessors represent about a third of its current order

backlog. Industry estimates put Airbus in the range of 40 per cent. Leasing’s share of the global commercial aircraft market is balanced, with leased single-aisle aircraft more prevalent than widebodies in US, Europe, Australasia, the Middle East and Russia. The balance is more equal between the two product classes within Latin America and Africa.

Source: Boeing.

By their nature, leasing firms may be involved in major manufacturer transactions on a yearly, or more frequent basis, compared to an airline that may run a campaign many years apart. Collins says this sets them apart in terms of their understanding of and influence over the market. “They’re a very sophisticated customer set. They’re very transactional, so they continually see the trends and the art of what’s possible. They’re very succinct in terms of negotiating deals with the OEMs. They’re moving to a level of sophistication from where they once were a reflection of the marketplace to now, where they are demanding OEMs drive the product to something that’s as liquid as possible. They look on the residual side as well – not just the initial lease, but the second, and potentially the third lease,” says Collins. Whereas manufacturers strive to keep airline customers loyal to their product lines, the situation is different when leasing firms are involved. While a few lessors deal in only one manufacturer’s products, diversity seems to be the name of the game for leasing firms.

“Some have had better relationships with one OEM or the other, and they’ve leveraged that. However, I think that rating agencies would criticise them for not having a balanced portfolio. We certainly see some lessors are more user-friendly than others, and we’re also very focused on understanding and grading the leasing firms on the value they bring to Boeing. That will be a focus of ours going forward,” explains Collins. Given that lessors are in the marketplace more frequently than typical airline buyers, how does that affect the new aircraft prices that leasing firms pay? “The price a leasing company pays versus a direct sale to an airline is competitive and determined by order size, commonality of the order (standard configurations versus more customised variants for multiple operators) and whether the customer is the sole source or working with both OEMs,” Collins clarifies. “Sole source customers do get better pricing that reflects the value of that relationship to us.” Collins notes that lessors have the choice to buy aircraft directly from OEMs or to acquire them via the sale and

afm • Issue 82 – January–February • www.afm.aero

TLF: Operating leases

Characteristics of an operating lease Under an operating lease, the two parties (the aircraft lessor and the lessee) agree the use of an aircraft asset for a period of time in exchange for a rental payment.

reserves and a security deposit typically equal to several months of lease payments and returned at the end of the lease.

Lease terms for the largest lease category – single-aisle aircraft – run from three to seven years on average. Lease terms for twin-aisle aircraft lease terms are typically longer given the greater asset purchase and reconfiguration costs.

Operating leases differ from a so-called ‘finance lease’. Here, a lessor acquires an aircraft and leases it to an operator over a longer term in a mortgage-like arrangement, which effectively results in aircraft ownership at the end of the lease. As such, finance leases are treated as assets and are typically carried on an operator’s balance sheet, which is not the case for operating leases.

Operating lease costs include the lease rate itself (typically one per cent of new aircraft cost per month), maintenance

Stage 1

Lessor acquires aircraft from manufacturer - Pays advance payments, arranges for delivery financing

Stage 4

Longer lease term is typical for widebodies

Stage 2

Stage 3

Airline leases aircraft from lessor

Stage 5

Lease term is usually short for standard body models, three to seven years is typical, but can range from one day to 80 per cent of an aircraft’s useful life

Stage 6

Aircraft returns to lessor at lease end

Airline may have option to renew lease or purchase aircraft at fair market value

Source: Boeing.

leaseback route if that pricing is advantageous. “However, the majority of leased airplanes in the global fleet have been purchased directly from the manufacturers,” he said.

Lessors as financiers Lessors have numerous important roles. To manufacturers, they are customers, offering a crucial distribution channel to airlines. To airlines, they supply an essential means to acquire aircraft under a more affordable method. Also, their role as a capital source deserves special attention.

“Lessors, in essence, are finance companies. As such, they have to have a better credit so they are more efficient sources of credit. They can get cheaper money and therefore that’s where their advantage lies relative to airlines,” says Kostya Zolotusky, managing director for capital markets development and leasing at Boeing Capital Corp , the manufacturer’s financing and leasing unit. “Meanwhile there continues to be turmoil in the financial markets. With commercial lenders focusing on premier

afm • Issue 82 – January–February • www.afm.aero

TLF: Operating leases

Leasing: Pros and cons

Advantages

Disadvantages

• • • • •

• • •

Reduced capital investment requirement Increased fleet plan flexibility Earlier delivery may be available Minimised impact on financial statement Payments can be fixed or floating depending on lessee requirements

credits, a lot of the airlines will be losing the capability to buy airplanes. That’s one of the reasons why leasing over the coming years will grow faster. In part, because the commercial bank markets will be more constrained. In part, because export credit will be more expensive and will require more equity,” Zolotusky notes. The Boeing executive said another key element in the lease-versus-purchase equation is an airline’s own long-term desires. “The airline operating business is very different from asset ownership and management. Lessors are, in essence, asset owners, investors and managers. While airlines historically bought airplanes, some have argued that may not be the most efficient way for them to use their capital. Many are deleveraging, that is, lowering their fixed cost. A number of airlines are coming to the conclusion that it may be better for someone else to own the assets, treat them as investments and have the associated residual risks. It’s the lessors and asset managers that take the residual view on aircraft,” Zolotusky said.

Leasing drawbacks As in any financial undertaking, aircraft leasing has both advantages and disadvantages. At an extreme level, when a lessee encounters financial distress, the lessor typically becomes its largest creditor. If a lessor decides to reduce exposure and recall its leased aircraft, an airline can no longer operate.

• • •

Exposure to lease rate fluctuations Airline fleet equity not gained Tax benefits may be smaller than purchase or finance lease Airline must satisfy lease contract requirements Lessor may restrict aircraft use Lessee pays withholding or other taxes

But according to Boeing’s Zolotusky, the lease-versuspurchase proposition is more a decision regarding how an operator wants to manage cash flow. “The drawbacks are that lessors usually require payment for all aspects of airplane utilisation and rent, meaning maintenance reserves and so on. That makes airlines’ cash flows much tighter. When airlines own, they have more flexibility in the cash flows associated with the airplane. They can put off saving for the maintenance. It gives you greater cash-flow flexibility, but the all-in costs should be the same because, if the airline’s profitable, it may be worthwhile to get the depreciation and tax benefits, but there are few profitable airlines. In the end, it comes down to cash flow flexibility,” says Zolotusky. When leasing companies look for new operator business, what kind of deals do they find appealing? According to Boeing’s Zolotusky, it comes down to two basic considerations – the quality of the aircraft involved and the customer involved. “If an airline wants to be an attractive leasing candidate, its aircraft type selection is important, as are its credit patterns,” Zolotusky says. “Lessors offer a very sensible business proposition. For airlines that want to be primarily airlines, it’s a very attractive and efficient service. Operators are developing a view that, in order to better concentrate on providing the service of getting people on planes, they don’t want to focus on the business of asset ownership and management, plain and simple.”

afm • Issue 82 – January–February • www.afm.aero

TLF: ETS

ETS: Where are we now? After years of dispute, the European Union has suspended its emissions trading scheme outside of Europe. But what comes next? Mary-Anne Baldwin investigates.

ew Year’s day, 2013 was to mark the third phase of the European Union’s Emissions Trading Scheme (EU ETS), which would have had airlines across the globe pay for the carbon they emitted during any flight that entered European airspace.

In the run up to this, non-EU countries signed petitions, appealed to the European Court of Justice and even threatened trade war. So it was perhaps unsurprising that 1 January came and went without fight. This is because the EU had already ‘stopped the clock’ on

applying the ETS to European Free Trade Association [EFTA] countries for a period of one year, until after the completion of the next ICAO Assembly in October 2013. However, the European Commission (EC) explained that it only stopped the clock to provide time for a global agreement on carbon tax. Should it not be reached, the ETS will be reinstated. “This is the chance,” warned Commissioner, Connie Hedegaard, member of the EC in charge of climate action,

afm • Issue 82 – January–February • www.afm.aero

TLF: ETS who spoke at the press conference following ICAO’s meeting on EU ETS. “We create this space for positive negotiations, but it has to be used… [or we will] automatically be back to where we are now.”

collected are required to be used for environmental purposes.” The US claimed the scheme was a breach of US sovereignty rules and, like China, announced that its airlines would not take part.

The opposition

Also speaking at ISTAT before the deferment of the scheme, John Hanlon, secretary general for the European Low Fare Airlines Association (ELFAA), urged governments not to adopt a “quick political fix that saves face but is not is to the best environmental solution.”

Back in October during the ISTAT Europe conference, Nico Bucholz, EVP of fleets for Lufthansa said: “We’re set up [for the ETS] but we dislike it.” Likewise, Bruno Delle SVP of fleets at Air France, said his company is also prepared to pay, but: “We’d do our utmost to avoid the system as it is.” He added: “It’s not an incentive any more, it’s just a tax.” Bucholz agreed, saying that with fuel costs so high, airlines are already incentivised to lower fuel burn and emissions. Jeff Gazzard, marketing manager at Aviation Environment Federation argued that: “You can’t take these gains on trust,” suggesting that Boeing and Airbus’ projections for fuel saving on their Next Generation aircraft may be little more than advertising. Backing a tax on emissions, he called the ETS a “modest step with modest costs”.

Although Hanlon was “very sceptical” that the ETS would result in a trade war, he firmly opposed the tax, noting that air passengers already pay general taxes and so already fund the aviation industry. “We don’t want death by a thousand taxes,” he said. He declared it is “shameful for me an Englishman” to have a government that supports the ETS, which he called “greedy”. The only way to dissolve this widespread view is is to ensure the transparency and fairness when spending the tax proceeds. Yet currently, there are no plans to spend the proceeds on either the environment or aviation.

EC Commissioner, Connie Hedegaard

We create this space for positive negotiations, but it has to be used… [or we will] automatically be back to where we are now

Gazzard chided Airbus and claimed that it took a “political miss-step” in warning government that the scheme may lead to a boycott by China. He added: “You are making real enemies, even amongst your friends.” However, Nancy Young, VP of environmental affairs at Airlines for America’s (A4A), backed Airbus by voicing her beliefs that the threat from China, and perhaps other countries, is real. She said prior to the postponement of the ETS: “I think we’re coming to a total trade war… It’s inevitable unless something does happen.” A4A has claimed the ETS is “illegal and has called it a “cash grab for the European Union as none of the funds

What does stopping the clock mean to airlines? So what does this mean for airlines? Julien Dufour, CEO and EU ETS lead auditor at VerifAvia, an emissions verification body for the aviation sector, explains: “This means that aircraft operators operating exclusively intercontinental flights (i.e. no intra-EU/EFTA flights) would be exempt from surrendering EU ETS allowances for at least a period of one year. Aircraft operators operating both intra-EU/EFTA and intercontinental flights would have to surrender allowances for intra-EU/EFTA flights, but possibly not for intercontinental flights. In short, this proposal does not have any impact on aircraft operators operating exclusively intra-EU/EFTA flights.

afm • Issue 82 – January–February • www.afm.aero

TLF: ETS

“Intercontinental flights might not need to be reported. The condition for this is that operators return the allowances that may have been allocated to them in relation to intercontinental flights.

have to cover the cost of ETS on all flights as compared to other airlines, which might be in a position to cross-subsidise the cost of ETS between affected and non-affected routes.”

“All airlines (EU and non-EU) operating intra-EU/EFTA flights are still required to monitor, report, verify and offset their emissions. There is no change for airlines operating intra-EU/EFTA flights only. But of course the costs will be much lower for airlines operating intercontinental flights since those flights do not have to be reported.”

Has the EU and its ETS simply failed?

Despite all the noise from non-EU countries, aren’t EU airlines now worse off than their foreign counterparts as only they are forced to pay this tax? “It is not about the nationality of the airlines but the routes flown,” argues Dufour. “On any given route, all airlines are treated equally. However, airlines operating intra-EU/EFTA flights only might feel they are at a disadvantage because they

Is stopping the clock merely a bid to calm a possible trade war, or a coy way for the EU to say ‘okay, you won’? One may wonder whether the EU was ever really powerful enough ever to enforce the ETS outside the EU. Perhaps not. Hedegaard claimed that while non-EU countries were loud and clear in their opposition, the EU will respond with full force should a global market-based agreement not be made. “Many have been busy trying to get rid of the EU regulations on CO2 emissions in the aviation industry without success. Many have lobbied us to give first a signal of flexibility and then, they would tell us whether

afm • Issue 82 – January–February • www.afm.aero

TLF: ETS they would move their position in ICAO. Of course we could not accept,” Hedegaard explained.

oil as the US, it would consume 380 million barrels a day. “Those figures just can’t happen.”

“The European Union has been very clear; nobody wants an international framework on aviation more than we do. Our EU legislation is not standing in the way of this and it never did. On the contrary, our regulatory scheme was adopted after having waited many years for ICAO to make progress.”

This year, we will consume 90 millions barrels a day. “This is not sustainable”.

She argued that, instead of admitting defeat, the EU has welcomed an opportunity for a global approach, which until now had not seemed feasible.

Indeed, some have questioned whether a global agreement, which would encompass so many disparate views and needs, could ever be reached.

But, says Geoffrey Lipman, president of International Council for Tourism Partners (ICTP): “What you’re trying to get a handle on is not so easily controlled.”

EC Commissioner, Connie Hedegaard

For the first time in years it seems that a global deal on aviation should be within reach, we must use that opportunity

“It seems that because of some countries’ dislike of our scheme, many of these countries are now prepared to move in ICAO and even to move towards a market-based mechanism at global level. “This is indeed progress. But actually, to get there, a lot of tough negations lie ahead of us.” Most people seem to agree that there is a need for a carbon emission tax, but simply disagree how to go about it. Paul Hooper senior consultant economics and regulation at Abu Dhabi’s Department of Transport, agrees with a tax on carbon with the caveat that it is supported by a global, rather than a European ETS scheme. He argued that anything else would “distort competitive playing fields”, something many non-EU countries also vehemently argue. He added: “One of the biggest problems is that it’s put Europe in conflict with the rest of the world.” According to Tom Sanchez, global lead, risk marketing at Shell trading, 2011 showed record figures for fuel consumption despite the economy. Shell’s calculations show that if the world were to use the same amount of

VerifAvia’s Dufour notes: “A market-based management (MBM) is extremely difficult to design and implement. It took many years for the EU to come up with the EU ETS, although the EU is a union composed of only 27 homogeneous countries. I cannot imagine a global MBM negotiated, approved and implemented by 190 countries before many, many years. Designing and implementing an MBM involves so many steps: monitoring rules; reporting rules; verification rules; registry rules; types of credits; accreditation rules; free credits allocation rules, etc.” What comes next is unclear, though it must include a great deal of negotiation and speed if a resolution is to be found by October this year. “For the first time in years it seems that a global deal on aviation should be within reach, we must use that opportunity,” said Hedegaard. While she admitted that “we have no guarantees,” she also added: “We all know this has been a very long story… now there is some movement, it’s very positive. I also think that the ICAO leadership has really invested a lot in terms of trying to prove that ICAO can deliver on this, that is also one of the reasons why I say there seems to be a chance.”

afm • Issue 82 – January–February • www.afm.aero

TLF: Economic age

afm • Issue 82 – January–February • www.afm.aero

TLF: Economic age

he economic lifespan of aircraft is always crucial to investors who will need to depreciate their assets and the subject is perhaps more relevant now than ever. Aircraft retirement age is dropping as Next Gen aircraft enter the market, age restrictions are enforced, and orderbooks burst with a record number of orders. There has also been much discussion about how to depreciate aircraft. If aircraft are simply no longer flying at the age of 25, surely investors should not depreciate them over the standard, but perhaps arbitrary, 25-year period. So do aircraft follow the same trend for obsolescence as cars and computers or is it more complicated than that? According to Abdol Moabery, CEO of GA Telesis, who spoke at last year’s ISTAT Europe during its first panel dedicated to this subject, economic life is “somewhere between 20 to 30 years, probably closer to 30.” As mentioned, the typical depreciation period is 25 years however, most airlines do not fly aircraft for that long. If an aircraft is returned to a lessor at 15-years-old, it would be hard to lease it again and the lessor could lose 10 years of service on his aircraft. “That, I think, is a huge risk,” admits Moabery.

“It clearly has an effect on the economic lives of aircraft built and delivered during the last phase of the model’s production cycle,” said Forsberg. Indeed, this is thought to be around three years. Using the 737-100/200 as an example, he split them into equal blocks of early-, mid- and late-build and noted a 6.5-year difference in the average retirement age between early and late-build aircraft. However, he also noted that over 350 737-200s have not yet been retired. Assuming the same trend in retirement, over the next year, the gap will narrow to four years. Forstberg warned that media reports, which include little analysis, have taken “a life of their own”. “This has had a damaging effect on the wider market” as financiers have been scared off or have tightened their terms. The danger is that publicising even one or two early retirements can create a slip-stream of them. If investors believe no one wants aircraft past the five- or 10-year mark, they won’t buy them, which would effectively force their early retirement. Avolon’s CEO, Dohmnal Slattery, reiterated this sentiment at ISTAT: “It’s very important we aren’t overly emotional… This situation could be a self-fulfilling prophecy.”

Avolon’s research Ireland-based lessor, Avolon, has carried out a great deal of research into the subject, which it presented in a webcast late last year.

Forstberg argued that focusing on recent changes does not give a clear indication of the industry over time. “The underlying profile of aircraft fleet retirement over the history

Dick Forsberg, head of strategy at Avolon

Over the past few years relatively young aircraft have been sold for part-out. These include some A318s, 737-600s as well as a couple of A319s and -700s Dick Forsberg, head of strategy at Avolon, explained: “Over the past few years relatively young aircraft have been sold for part-out. These include some A318s, 737-600s as well as a couple of A319s and -700s.” He noted that the operating base of these aircraft is thin and that a shortage of spare CFM 56 engine capacity has led to demand for spares, which made “part-out an attractive alternative to leasing.” He also said that as the Neo and Max enter the market, concerns are being aired regarding those aircraft last off the line – i.e. the last of their type to be produced. These aircraft have a shorter economic life than those produced earlier in the cycle as they are so closely followed by the next round in technological advances.

of commercial jet aircraft forms a stable pattern and has not deteriorated over the last couple of years. Late production models do not have dramatically shorter lives.” He believes that the average useful age of an aircraft has actually risen from 8.4 years in the 1990s to 11 years today. However, he also admitted that age is the strongest driver for retirement, and predicted that “some 8,000 commercial aircraft will be retired over the last decade, more than all the jet aircraft to retire to date”. Yet, Forstberg also highlighted that the average retirement age is 25.9 years, only 50 per cent of aircraft are retired at

afm • Issue 82 – January–February • www.afm.aero

TLF: Economic age 25 year or older and 60 per cent are still in service at 25 years old. He added that these numbers have been steady for a long period, indeed rising slightly in recent years. The retirement age for a narrowbody aircraft is 27 and for a widebody it is 24.5. However, he says that widebody retirement is “more concentrated.” According to Forsberg, 70 per cent of narrowbodies and 60 per cent of widebodies are still in service at 25 years old.

The A320 The A320 has received a lot of media coverage regarding early part-outs and retirements. Lease rates for the A320 have fallen to surprising levels. At last year’s ISTAT Europe conference, Kostya Zolotusky, managing director capital markets development for rival Boeing Captial Corp admitted: “A320 values fell two years ago: We were worried.” However, he attributed this to older aircraft coming back onto the market, rather than overproduction. As of late last year, there had been 120 retirements for the A320 alone. Recent part-outs include seven ex-Frontier A318s and two ex-Cyprus Airways A319s retired by three lessors at three to 10 years. But Forsberg says: “They do not represent a meaningful trend.” Rather, these aircraft were parted out for specific reasons that are unlikely to be repeated. The A320 still has an average retirement age of 19.4 years and the first A320 was delivered in 1988, so the oldest is only 24. “While industry commentators make much of A320 retirements, it is important to remember that only three per cent of those aircraft have so far been retired. When it comes to 737 Classics, just 16 per cent have been retired and only 25 per cent of the MD-80 fleet are gone, which is still well short of a majority. For this reason, the relatively low average retirement age of current fleets should not be taken as evidence for change in retirement patterns, this is simply a consequence of the youthfulness of the fleet.” Mark Lynch, EVP of GE Capital Aviation Services, noted at the conference that there is a difference between economic life and depreciation. It is not just about how long an aircraft flies but when an investor can sell it and when it starts to depreciate significantly. Indeed, Slattery argued that depreciation and economic life are two “completely separate” subjects. “It’s a normal trend to see a shorter economic life.” Slattery would argue that aircraft do indeed depreciate like cars and computers, but that their deprecation should be looked at separately to their economic life. As an example, an aircraft may have a useful life of 25 years, but it may be retired at 15 and depreciated at 20. Any one of these numbers can change independent of the others.

afm • Issue 82 – January–February • www.afm.aero

TLF: Economic age Hinting at overproduction, Slattery said: “Discipline from the OEMs does play a part in this.”

When over-production meets age restrictions In an interview with AFM last year, Stephen Hannahs, CEO of Aviation Capital Group (ACG), said: “Some relatively young aircraft (less than 15 years) are being retired. In a normal environment, these aircraft would remain in service. With this being the case, I believe OEMs are over-producing at the moment. “In my view, the average economic life of an aircraft is 25 years. There is nothing to suggest that structurally an airframe or engines cannot provide service for this period. This topic has received a great deal of attention given the removal of aircraft from service in earlier than expected or typical periods. I believe that this is a function of the OEM production and the economic environment.” “An aircraft is a flying bond,” said Slattery. He believes that as lessors set the lease rates, they are best placed to answer whether OEMs are overproducing, which indeed, many do. “If we’re too aggressive producing aircraft, we’ll damage residual values.” Yet because they have the purchasing power, it is airlines that decide when an aircraft becomes economically obsolete. If they choose and can afford to run a fleet of five-years-old or younger, it is of course their right. The aircraft sector understanding (ASU), which will make financing for new aircraft more costly, will affect airlines’ ability to buy aircraft, forcing them to buy older and cheaper aircraft. However, many countries – which do not want to be seen as ‘dumping grounds’ for older aircraft – have set restrictions on the age of aircraft allowed to operate from their countries. Governments have instilled tight age restrictions in a bid in increase some of the lowest safety records and to make public perception more positive, but this makes the market for used aircraft much smaller. According to Moabery, regulators are dictating to manufacturers and airlines – which is something that must stop. Phil Seymour, president and chief executive officer, IBA Group, who headed the ISTAT panel, noted there have been discussions with regulators but their response is that the new methods are the easiest way to regulate safety. All things considered, it is clear that the economic life and the depreciation of aircraft is far more complicated than it is for cars or computers. Indeed, aircraft are considerably more expensive, meaning these considerations are more crucial, but aircraft are also part of a much wider web of concerns. Although there has been no change to the standard age of depreciate, nor any agreement, the subject will continue to be important to both aircraft owners and manufacturers.

afm • Issue 82 – January–February • www.afm.aero

AIRPORTS & ROUTES: Airline and airport partnerships

Airline and airport partnerships: In pursuit of ancillaries Mary-Anne Baldwin reports from the Low Cost Airlines World conference at which airlines and airports came together to discuss cost-effective partnerships.

ccording to Andreas Schulz, consultant at Aviation Tourism, airlines raised $22bn in ancillary revenues during 2011 and some airlines generate 30 per cent of their revenue through

Jochen Schnadt, Monarch’s commercial director, noted that while his airline used to unbundle its costs, it now repackages them to provide clarity during the booking process. Having conducted many surveys, Monarch believes this is what customers want.

these means. In his opening remarks at the Low Cost Airlines World (LCAW) conference, Schulz noted that according to ACI, every other European airport is a loss maker. And while airlines pull a large sum from ancillary products, their profit margins remain exceptionally small. For both parties, ancillary revenue is a great source of financial strength.

Monarch is aware that many of its passengers are seasonal travellers flying to ski destinations. However, no matter how reasonable the cost of their flight, many travellers are faced with high charges getting from the airport to the ski resort. Monarch is speaking with other service providers involved in such holidays in the hope of facilitating the

afm • Issue 82 – January–February • www.afm.aero

AIRPORTS & ROUTES: Airline and airport partnerships purchase of their products and services. This would allow passengers to book ski classes, equipment rental, shuttle buses, accommodation and flights in one easy process, all of which would provide Monarch with additional revenue. These kind of ancillary offers can be financially successful but they also add to the sometimes overwhelming list of options during the booking process.

adheres to many regulations, it also has a great deal of freedom. For example, it sublets a retail outlet to Dunkin’ Donuts, which also provides the coffee on board jetBlue flights. According to Schnadt, this ensures that the passenger receives the ‘jetBlue experience’ as soon as they arrive at the terminal, though another obvious benefit is that the carrier can use its terminal retail space to broker good deals such as catering.

Retail therapy or ripped off? The feeling of being ripped off by additional charges frustrates most passengers, said Robin Hayes, EVP and COO of jetBlue. Yet he reminded the audience of the airline’s lofty premise when it started 10 years ago. It was to ask at all times, ‘what are we adding to humanity?’

Double act Sometimes an airline’s agenda can be at odds with its airport’s. For example, budget carriers often prefer a ‘first come, first served’ approach to seat allocation, which speeds up turnaround times. However, allocated seats often allow passengers to spend more time

Ancillaries have become as familiar as your living room wallpaper. As such, some airlines and airports have decided to work together to deliver a new tier of added extras jetBlue aims to deliver a good service – such as free on board Wi-Fi, which will be rolled out in 1Q 2013 – but it is not adverse to charging for extras. For example, the first bag is free but the second comes at a cost. If you want a seat with extra legroom (at 38 inches) it will cost an additional $10 to $70, depending on the length of the flight. These types of ancillaries have become as familiar as your living room wallpaper. As such, some airlines and airports have decided to work together to deliver a new tier of added extras, but jetBlue treads the opposite path. In its pursuit of ancillary revenue, jetBlue bypassed airport partnerships and decided to do it all itself. The carrier rents its own terminal at New York’s JFK airport, T5. Schnadt explains that although it

shopping and less time queuing to get on board, which airports prefer. Airlines like Monarch are looking at ways to get around this. Schnadt said that his carrier is researching how passengers can order products from the airport’s shops online, using their mobile phones. He added that Monarch is focused on working with its airports: “We talk about partnerships, not contracts.” He believes that the aim for both parties is to make the act of flying “hassle free”, for which, he says, passengers “may be willing to part with the extra pound or few, and that’s what it’s really all about.” He added that the two parties must work together to provide this quality of service, starting with understanding the customer. He asked what a family with young children might find stressful about the airport experience and what Monarch and its airport

afm • Issue 82 – January–February • www.afm.aero

AIRPORTS & ROUTES: Airline and airport partnerships

might do to alleviate this. “We can’t do it alone but with airport partnerships, we can.” By way of partnering with airlines, Copenhagen Airport offers fast-track boarding and lounge access, which are sold through the airline. In another example of teaming-up, Steve Tarbuck, business development manager at the airport noted that some airlines, particularly budget carriers, might have stricter baggage allowance. He says that the airport will cater for this but the two must work together to inform the customer during the booking process and provide better signage within the airport during the check-in process. He advocates communication with airlines, even if a means of partnering or boosting ancillaries is never

agreed, as it will strengthen the relationship between the airport and airline. He also suggested that airports invite airlines to development project meetings so they feel involved in the progress of the airport and can have their needs considered. When asked how to create a win-win relationship between airports and airlines, Andrzej Kobielski, commercial director at Enter Air, called for a volumebased discount scheme arranged around the number of aircraft or passengers that an airline brings to an airport. He suggested that airports and authorities set up these schemes for the sake of all parties. Additionally, he argued that infrastructure development should focus on making the flight experience easy for passengers. “This is what airports should invest in – not

afm • Issue 82 – January–February • www.afm.aero

AIRPORTS & ROUTES: Airline and airport partnerships

Unbundled and bundled again, airlines have looked to make a profit from every aspect of flying. But doing so in partnership with airports is still new Tarbuck says that Copenhagen Airport is planning automated baggage drop facilities and at the time of writing had a tender open for this service. Plans for its new facilities involve passengers arriving with their bags pre-tagged. This will increase the number of bags that can be handled and will enable the airport to hit its target handling time of 20 to 30 seconds per bag. But with baggage handling tightened, won’t the bottleneck of passengers just move to security screening not the shops? Tarbuck argued that clever management would reduce potential delays and speed up throughput. For example, Monarch offers its passengers an iPhone app, which provides an automatic pop-up containing the customer’s booking reference when they are due to board. Over a million people have used the app so far. in marble and glass.” He urged to make it cheap and simple for travellers so everyone will prosper.

Baggage and security “We haven’t been creative enough”, said jetBlue’s Hayes regarding the two worst aspects of flying – baggage and security. Dealing with these issues will allow airports to provide better retail opportunities and better service to customers. Pete McGlade, senior strategic advisor at Southwest Airlines believes that the check-in process will become automated through the use of the Internet. While he noted that the older generation may be adverse to checking-in online, “certainly our children and grandchildren would think, why do otherwise?”

Copenhagen Airport has an app that shows passengers the current security screening times. Meanwhile, it offers a low-cost model, which mirrors that of its airline customers. All passengers at Copenhagen arrive at the same point, enter the same security screening and share open access to all lounges and facilities, yet, says Tarbuck, the single-class system does not limit queues. It may seem that the ancillary market has already been bled dry. Unbundled and bundled again, airlines have looked to make a profit from every aspect of flying. But doing so in partnership with airports is still new. Working together in this way could not only provide a more harmonious experience for the passenger (therefore bringing repeat custom), could also open new possibilities for ancillary sales.

afm • Issue 82 – January–February • www.afm.aero

INDUSTRY DATA: Air transport costs

Industry data

59 60 61 62

Air transport costs

Fuel costs

63 64 65 66

Profit and productivity

Long-term profitability

and ROC

Firm orders

Airbus list prices and

lease rates

Boeing list prices and

lease rates

Engine data

2.60

1.40

2.40

1.30

2.20

1.20

2.00

1.10

1.80

1.00

Airline real unit costs (right scale)

1.60

0.90

1.40

0.80

1.20

0.70

Real price of air transport (left scale)

1.00

Real unit costs

Real price of air transport

The real cost of air transport has more than halved

0.60

0.80

0.50

0.60

0.40 1970

1975

1980

1985

1990

1995

2000

2005

2010F

Source: ICAO, IATA

afm • Issue 82 – January–February • www.afm.aero

INDUSTRY DATA: Fuel costs

Industry fuel costs and net profits

Average price per barrel of Brent Crude Oil 73.0 99.0 62.0 79.4 112.0 99.0

240 Net profits (LHS) Total industry fuel costs (RHS)

Net profits ($ billion)

14.7

190

8.8

6.7

5.0

8.4 140

0 -5 -7.5

-10 -15

-13.0

-5.6

-4.1

-4.6

-11.3

Total industry costs ($ billion)

19.2

-20 -25 -30

-26.1 2001 2002 2003 2004 2005 2006 2007 2008

2009 2010

2011 2012 F 2013F

-10

Source: Industry Financial Forecast Table (IATA Economics) 12/2012.

Fuel impact on operating costs

% of Operating

Average price per

Break-even price

costs

Barrel of Crude (US$)

per barrel (US$)

Total fuel cost

2003

14%

US$28.8

US$23.4

US$44 billion

2004

17%

US$38.3

US$34.5

US$65 billion

2005

22%

US$54.5

US$51.8

US$91 billion

2006

26%

US$65.1

US$68.3

US$117 billion

2007

28%

US$73.0

US$82.2

US$135 billion

2008

33%

US$99.0

US$82.5

US$189 billion

2009

26%

US$62.0

US$58.9

US$125 billion

2010

26%

US$79.4

US$91.8

US$139 billion

2011

30%

US$111.2

US$116.7

US$176 billion

2012 F

33%

US$109.5

US$113.6

US$209 billion

2013 F

33%

US$104.0

US$109.1

US$210 billion

Source: Industry Financial Forecast Table (IATA Economics), 12/2012.

afm • Issue 82 – January–February • www.afm.aero

INDUSTRY DATA: Profit and productivity

Labour productivity has also risen sharply 1400

Labour productivity

Index

1050

700

Aircraft productivity

350

Fuel productivity 0 1960

2000

2005

Source: ICAO, BACK, IMF, OECD.

Airlines continue to create economic profits during the 2000s 340

140 120 100 80 60 40 20 0 Emirates

Ryanair

Aeroflot

LAN

COPA

Air Arabia easyJet

Allegiant

Aegean

McKinsey & Company for IATA.

afm • Issue 82 – January–February • www.afm.aero

INDUSTRY DATA: profitability and ROC

Airline profitability over the past 40 years

EBIT margin

40-year average (0.1%)

-0%

Net post-tax profit margin

-2%

-4%

-6% 1970

1975

1980

1985

1990

1995

2000

2010F

2005

Source: ICAO, IATA.

Return on capital for airlines by region, % of invested capita 12%

10%

% invested capital

-2%

-4% 1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: McKinsey & Company for IATA.

afm • Issue 82 – January–February • www.afm.aero

INDUSTRY DATA: Firm orders Firm orders – January at a glance

Firm orders – January 2013

Data supplied by IBA’s JetData. www.ibagroup.com

Manufacturer Variant Customer Order Date Number of Aircraft A321 Transasia Airways 08/11/2012 6 Airbus Airbus A330-200 Iraq Ministry of Transportation 09/11/2012 1 Airbus A320 InterJet 13/11/2012 40 Airbus A340-500 AJW Capital Partners 15/11/2012 2 Airbus A319 Tibet airlines 19/11/2012 1 Airbus A320 CALC 30/11/2012 28 Airbus A321 CALC 30/11/2012 8 Airbus A320ceo AirAsia 30/11/2012 36 Airbus A320neo AirAsia 30/11/2012 64 Airbus A321neo Pegasus 18/12/2012 18 Airbus A320neo Pegasus 18/12/2012 57 Airbus A320neo Citilink 18/12/2012 25 Airbus A350-900 CIT Group 03/01/2013 10 Airbus A320neo Middle East Airlines 09/01/2013 5 Airbus A321neo Middle East Airlines 09/01/2013 5 Airbus A320neo Avolon 10/01/2013 20 Airbus A320 & A321 BOC Aviation 15/01/2013 25 Airbus A320neo & A321neo BOC Aviation 15/01/2013 25 ATR 72-600 Avianca Taca 13/12/2012 15 ATR 72-600 Aviation PLC 18/12/2013 7 Boeing 737-MAX Aeromexico 05/11/2012 60 Boeing 787-8 Unidentified Customer(s) 07/11/2012 1 Boeing 787-9 Unidentified Customer(s) 07/11/2012 4 Boeing 737-800 SilkAir 09/11/2012 23 Boeing 737-MAX SilkAir 09/11/2012 31 Boeing 787-8 Business Jet / VIP Customer(s) 13/11/2012 1 737-800 Unidentified Customer(s) 13/11/2012 2 Boeing Boeing 747-8F Unidentified Customer(s) 27/11/2012 2 Boeing 737-800 GECAS 07/12/2012 4 Boeing 777-300ER Turkish Airlines 07/12/2012 15 Boeing 767-300F FedEx 11/12/2012 4 Boeing 777-300ER Unidentified Customer(s) 17/12/2012 30 Boeing 737-MAX Aviation Capital Group 20/12/2012 60 Boeing 737-700C United States Navy 20/12/2012 2 Boeing 777-300ER China Airlines 21/12/2012 6 Boeing 737-MAX Unidentified Customer(s) 21/12/2012 35 Boeing 787-9 Aeromexico 24/12/2012 6 Boeing 737-800 Unidentified Customer(s) 27/12/2012 5 Boeing 737 Unidentified Customer(s) 10/01/2013 2 Boeing 777-200LR Republic of Iraq 14/12/2012 1 Boeing 737-800 Unidentified Customer(s) 17/12/2012 15 Bombardier CRJ900 Delta Airlines 06/12/2012 40 Bombardier CRJ700 Undisclosed (china) 06/12/2012 7 Bombardier CS300 airbaltic 20/12/2012 10 Embraer E-190 Azerbaijan airlines 14/11/2012 4 Embraer E-175 Fuji Dream 21/12/2012 2 Mitsubishi MRJ SkyWest 13/12/2012 100

Engines

P&WC P&WC CF GE GE CF CF GE CF GE CF GE GE GE CF CF GE CF CF GE CF GE GE P&W GE GE P&W

Source: IBA’s JetData.

afm • Issue 82 – January–February • www.afm.aero

INDUSTRY DATA: List prices Data supplied by IBA’s JetData. www.ibagroup.com

Airbus list prices at a glance

A300600R

A310200

A310300

A318100

A319100

A320200

A321100

A321200

A330200

A330200F

A330300

A340200

A340300

A340500

A340600

A380800

Source: IBA’s JetData.

List prices and lease rates – January 2013

Data supplied by IBA’s JetData. www.ibagroup.com

Manufacturer Average Type Current Market Value Dry Lease Rate List Price % Oldest Newest Change Oldest Newest Airbus - A300-600R $4.30m $13.00m -8% $0.070m $0.170m Airbus - A310-200 $1.50m $2.20m -3% $0.050m $0.090m Airbus - A310-300 $3.50m $8.40m -1% $0.070m $0.140m Airbus $67.70m A318-100 $12.00m $25.00m 0% $0.120m $0.230m Airbus $80.70m A319-100 $9.50m $35.00m 0% $0.110m $0.270m Airbus $88.30m A320-200 $4.00m $40.50m 0% $0.065m $0.310m Airbus - A321-100 $10.00m $18.00m -3% $0.090m $0.200m Airbus $103.60m A321-200 $17.00m $48.00m 0% $0.165m $0.365m Airbus $208.60m A330-200 $35.00m $86.50m -2% $0.350m $0.850m Airbus $211.50m A330-200F $80.00m $91.00m 0% $0.750m $0.800m Airbus $231.10m A330-300 $18.00m $98.00m 0% $0.180m $0.900m Airbus - A340-200 $8.00m $15.00m -2% $0.150m $0.300m - A340-300 $8.00m $43.00m -2% $0.150m $0.500m Airbus Airbus - A340-500 $45.00m $80.00m -11% $0.440m $0.790m Airbus - A340-600 $45.00m $90.00m -7% $0.480m $0.830m Airbus $389.90m A380-800 $140.00m $205.00m 0% $1.350m $2.000m Boeing - B717-200 $6.60m $11.00m 0% $0.075m $0.140m Boeing - B737-300 $1.70m $5.50m -4% $0.040m $0.080m Boeing - B737-400 $3.00m $6.50m -2% $0.050m $0.090m Boeing - B737-500 $2.00m $4.80m -1% $0.040m $0.070m Boeing - B737-600 $9.50m $17.00m -5% $0.100m $0.160m Boeing $74.80m B737-700 $12.00m $34.50m 0% $0.120m $0.300m Boeing $89.10m B737-800 $15.00m $46.00m -1% $0.190m $0.360m Boeing - B737-900 $16.00m $24.00m -2% $0.150m $0.220m Boeing $94.60m B737-900ER $30.00m $48.50m -3% $0.260m $0.390m Boeing - B747-400 $11.50m $42.50m -7% $0.200m $0.500m Boeing $352.00m B747-8F - $175.00m 0% - $1.500m Boeing - B757-200 $5.50m $22.00m -1% $0.080m $0.220m Boeing $160.20m B767-200ER $2.40m $17.00m 0% $0.090m $0.250m Boeing $182.80m B767-300ER $9.50m $61.50m -1% $0.160m $0.460m Boeing $185.40m B767-300F $28.00m $68.00m -2% $0.300m $0.580m Boeing - B777-200 $22.00m $53.00m 0% $0.260m $0.420m Boeing $258.80m B777-200ER $44.00m $118.00m -1% $0.450m $0.950m

% Change -8% -15% -7% 0% 0% 0% 0% 0% -3% 0% 0% 0% -11% 0% 0% 2% 0% -8% -13% -4% -10% 0% 0% 0% 0% -7% 0% -6% -8% -2% 0% -4% 0%

Source: IBA’s JetData.

afm • Issue 82 – January–February • www.afm.aero

INDUSTRY DATA: List prices Data supplied by IBA’s JetData. www.ibagroup.com

Boeing list prices at a glance

B717- B737- B737- B737- B737- B737- B737- B737- B737- B747- B747- B757- B767- B767- B767- B777- B777- B777- B777F B777- B777- B787-8 200 300 400 500 600 700 800 900 900ER 400 8F 200 200ER 300ER 300F 200 200ER 200LR 300 300ER

Source: IBA’s JetData.

List prices and lease rates – January 2013

Data supplied by IBA’s JetData. www.ibagroup.com

Manufacturer Average Type Current Market Value Dry Lease Rate List Price % Oldest Newest Change Oldest Newest Boeing $291.20m B777-200LR $86.75m $143.00m 0% Boeing $295.70m B777F $133.00m $165.00m -2% Boeing - B777-300 $43.00m $75.00m -2% Boeing $315.00m B777-300ER $88.00m $162.00m -1% Boeing $206.80m B787-8 $100.00m $113.00m -2% Boeing McDonnell Douglas - MD-11 $10.00m $16.00m 0% Boeing McDonnell Douglas - MD-81 $0.50m $1.00m -12% Boeing McDonnell Douglas - MD-82 $0.50m $1.50m -23% Boeing McDonnell Douglas - MD-83 $0.80m $2.20m -23% Boeing McDonnell Douglas - MD-87 $1.00m $1.70m -23% Boeing McDonnell Douglas - MD-88 $1.20m $2.40m -23% Boeing McDonnell Douglas - MD-90 $4.50m $5.90m 0% Bombardier (Canadair) - CRJ-100/200 $1.80m $5.90m 0% Bombardier (Canadair) $37.30m CRJ-700/705 $9.60m $22.50m -3% Bombardier (Canadair) $42.80m CRJ-900 $12.00m $25.00m -1% Bombardier (Canadair) CRJ-1000 $23.00m $27.50m 0% Bombardier - Q200 $4.50m $8.50m 0% Bombardier - Q300 $5.30m $11.50m 0% Bombardier $30.00m Q400 $10.00m $21.00m 0% Embraer $21.58m ERJ-135ER $1.70m $5.00m -21% Embraer $28.02m ERJ-145ER $3.30m $8.00m -12% Embraer $38.66m E170 LR $14.00m $26.50m -2% Embraer $41.61m E175 LR $17.00m $28.95m -1% Embraer $46.08m E190 LR $20.00m $33.00m -1% Embraer $48.67m E195 LR $22.00m $34.00m -3% Fokker - Fokker 70 $2.00m $2.80m -8% Fokker - Fokker 100 $2.00m $3.30m -5% Sukhoi SSJ 100-95B $22.00m $24.00m 0% Sukhoi SSJ 100-95LR $22.80m $24.70m 0% ATR $18.10m ATR 42-500 $4.20m $15.00m 0% ATR $18.90m ATR 72-500 $6.40m $19.30m 0% ATR $21.90m ATR 42-600 - $15.66m 0% ATR $22.70m ATR 72-600 - $20.00m 0%

$0.800m $1.200m $0.415m $0.850m $0.900m $0.150m $0.025m $0.025m $0.035m $0.025m $0.035m $0.072m $0.035m $0.090m $0.120m $0.200m $0.035m $0.045m $0.100m $0.030m $0.040m $0.140m $0.160m $0.180m $0.200m $0.040m $0.045m $0.177m $0.182m $0.060m $0.080m - -

$1.250m $1.400m $0.650m $1.500m $1.100m $0.230m $0.035m $0.045m $0.060m $0.040m $0.060m $0.100m $0.070m $0.220m $0.230m $0.260m $0.080m $0.120m $0.200m $0.050m $0.080m $0.230m $0.250m $0.280m $0.300m $0.070m $0.090m $0.225m $0.230m $0.140m $0.190m $0.150m $0.190m

% Change 0% 0% 0% 4% 0% 0% 0% 0% 0% -7% 0% 0% -9% -6% -9% -2% 0% 0% 0% 0% 0% -3% -1% -3% -4% 10% 8% 0% 0% 0% 0% 3% 0%

Source: IBA’s IBA’s JetData. JetData. Source:

afm • Issue 82 – January–February • www.afm.aero

INDUSTRY DATA: Engine data Data supplied by IBA’s JetData. www.ibagroup.com

Engine data – January at a glance

B737- B737- B737- A321- A319- A340- B737- B737- B737- B737- CRJ300 400 500 200 100 300 600 700 800 900ER 200

CRJ- E170/ E190/ A300- B767- MD-11 200 300ER 200 B747- A310- B757- Fokker A340- A330- B777- A380- ERJ700 175 195 600R 300ER A330- B777- A320- MD-82 400 300 200 100 600 300 200ER 800 145

B717200

Source: IBA’s JetData.

Engine data – January

Data supplied by IBA’s JetData. www.ibagroup.com

Type Engine Full-life mkt value Current half-life mkt value Mkt lease rate January 2013 January 2013 January 2013 B737-300 CFM56-3B1 $1.30m $0.60m $0.020m B737-400 CFM56-3B2 $1.90m $1.00m $0.022m B737-500 CFM56-3C1 $2.50m $1.50m $0.032m A321-200 CFM56-5B3/P $8.65m $6.40m $0.070m A319-100 CFM56-5B5/P $6.65m $4.40m $0.048m A340-300 CFM56-5C4/P $6.00m $4.00m $0.045m B737-600 CFM56-7B22 $7.00m $4.80m $0.048m B737-700 CFM56-7B24 $7.70m $5.50m $0.055m B737-800 CFM56-7B26 $8.60m $6.40m $0.070m B737-900ER CFM56-7B27 $8.90m $6.70m $0.072m CRJ-200 CF34-3B1 $2.25m $1.25m $0.020m CRJ-700 CF34-8C5 $4.60m $3.10m $0.045m E170/175 CF34-8E5 $4.70m $3.20m $0.045m E190/195 CF34-10E6 $6.35m $4.80m $0.065m A300-600R CF6-80C2A5 $5.80m $3.20m $0.045m B767-300ER CF6-80C2B6F $7.50m $4.50m $0.054m MD-11 CF6-80C2D1F $5.80m $3.00m $0.045m A330-200 CF6-80E1A3 $14.80m $9.85m $0.120m B777-300ER GE90-115B $29.30m $21.80m $0.280m A320-200 V2527-A5 $7.75m $5.30m $0.060m MD-82 JT8D-217C $0.90m $0.50m $0.018m B747-400 PW4056 $7.00m $4.10m $0.055m A310-300 PW4152 $6.30m $3.40m $0.045m B757-200 RB211-535E4 $4.95m $2.80m $0.040m Fokker 100 RB183 Tay 650-15 $2.00m $1.40m $0.025m A340-600 Trent 556-61 $14.48m $8.60m $0.110m A330-300 Trent 772B-60 $14.58m $8.90m $0.120m B777-200ER Trent 895 $21.10m $14.00m $0.170m A380-800 Trent 970 $19.80m $13.80m $0.170m ERJ-145 ER AE3007-A1 $2.35m $1.35m $0.025m B717-200 BR715A $4.00m $2.50m $0.042m Source: IBA’s JetData.

afm • Issue 82 – January–February • www.afm.aero